the middle man

Gary Shepherd speaks to Paul Spencer about the under-owned nature of mid caps, the frustrations of owning a stock that’s too successful, and the transition from Investec to Franklin Templeton.

the middle man


The sale last year of Rensburg Fund Management by Investec to Franklin Templeton took many by surprise. A small Leeds-based UK equity team, it strikes a contrast to its grand multi-national parents of past and present.

It is at Franklin Templeton’s swish Thames-side offices where I meet the modest Paul Spencer, specialist in the understated UK mid-cap sector. His fund, Franklin UK Mid Cap, has actually grown significantly in recent years to a sum of around £560m at the time of our meeting, though Spencer remains mystified as to why specialist FTSE 250 funds remain absent from most investors’ portfolios.

Under-owned asset class?

“The FTSE 250 is 12% of the FTSE All Share and yet there are only three unit trust/Oeics in the whole of the UK market over £100m of market AUM [Franklin UK Mid Cap, Old Mutual UK Select Mid Cap and Schroder UK Mid Cap],” he remarks.

“Yet small cap is 1% of the All Share and there are 12 funds of £100m plus discrete AUM. From my perspective, it looks like an under-owned asset class despite mid caps’ outperformance for over a decade now.”

Spencer’s expertise in the sector began as an analyst in 1987 at BWD Securities, not long before it merged with Rensburg. In 1991 he took on his first fund, BWD UK Smaller Companies Trust, before leaving to join Granville Davies in 1995. Four years later he joined TD Waterhouse as head of research, specialising in small and mid caps.

Perfect timing

In 2006 he returned to Rensburg, where he took on the fund he manages today – then at a relatively paltry £35m AUM – from the departing Leigh Himsworth.

“The timing was perfect to go back to Rensburg when Leigh left, as I was getting very stale in broking and I wanted to run money again,” he remembers.

“The Mid Cap Fund was something I felt I had an affinity with because I had researched the sectors as an analyst – the house builders, the engineers, leisure and tech, which I felt I had a reasonable understanding of. We moved about a mile from one side of Leeds to another, and went back to work with people I had worked with 20 years’ previously when I was initially at Rensburg.”

Of those aforementioned sectors, it is the house builders that most excite Spencer today; a theme he is currently playing in his fund is looking to a stable UK housing market in the coming years, which makes up around 15% of the fund.

He has an overweight position through Berkeley Group, Persimmon and Bovis Homes, as well as holdings in builders’ merchants Travis Perkins and Howden Joinery, and residential landlord Grainger.

Another theme he is playing is the long-term need for the mass affluent to save, hence holdings in wealth managers St James Place, Rathbones and Jupiter. Historically, he also held Hargreaves Lansdown, but sold out last year when it entered the FTSE 100.

Sell discipline

Is this movement of stocks to outside of the FTSE 250 a problem for him? He admits it can cause some frustration.

“It can be a psychological problem if a stock has gone into the FTSE 100 because it has performed really well. It is probably a stock I really like and is hard to sell,” he says. “But I run a mid-cap fund and people expect me to invest in mid-cap stocks, not FTSE 100 stocks. Besides, at the last review, Inmarsat and Cairn Energy dropped into my benchmark and I bought both.”

Currently, Spencer holds 41 stocks in the fund from an investible universe which he sees as being closer to 150 than 250 – he excludes around 50 investment trusts and another 50 stocks, which he avoids due to negative factors such as balance sheet or management risk. 

He adds: “The fact that I have around 40 holdings suggests to me that we are not padding the fund out with stocks that do not look attractively valued. We have been as low as 38 in the past year, though the long-term average is around 45.”

About 55% of the fund is built around overseas earners at present, with a significant overweight to the US – five companies in the portfolio report in dollars.

Though essentially a stock picker, Spencer takes a broad macro view and he shifts the earnings emphasis depending where he sees value emerging.

Given the current sorry state of the domestic economy, Spencer understandably remains cautious on consumer-facing stocks. However, he does favour stocks such as car retailer Inchcape that target the premium end of the market.

Manager contact

He adds: “You have to be careful assuming the UK is all one market place, with various sectors doing really well. The premium end has held up well, assuming where you might think it should be in a recession, whereas value propositions are the ones that have suffered in the past two or three years.”

In terms of his day-to-day role, Spencer sees meeting management as the “final piece in the jigsaw”, rather than the most important element of research – most of the key company information, he says, can be found in the report and accounts.

He explains: “If you are investing in a business which has great fundamentals anyway, a management team just needs to be able to keep that ship steered on a certain path.

“Equally, if you have a great management team in a business that is structurally flawed with dreadful economics, it does not matter how good that management team is, you end up with the same result: poor investment returns.

“We used to cover textile companies but they all disappeared – it was never good enough to invest in the best managed one because they were all basically fundamentally bad investments. Many industries in the UK have disappeared, such as printing, publishing, packaging and chemicals; sectors where there were lots of stocks, and there were good management teams in all of those. You are better off finding a good industry with a perfectly reasonable management team than always thinking that great management can always sort things out.”

For fund managers, of course, it is a different story, with the most skilful stock pickers generally rising to the top of the pack. In this regard, given his record of outperformance of his benchmark, Spencer is genuinely one of the highest-regarded UK equity fund managers working today.

A matter of scale

Will this continue under Franklin Templeton’s ownership? Spencer is unlikely to say anything negative about his new employer, though the list of benefits – the use of a centralised dealing team in Edinburgh and a new office (in Leeds of course) – seem sensible plus points. 

Perhaps the most obvious non-market-related risk to his investors could be the scale of the fund becoming unworkable, particularly given how much it has grown in recent years. Spencer says he does have a figure in mind when a soft closure could become a possibility, though he is not telling.

Long-term growth

However, he is comfortable with the fund as it stands: “If you had asked me two years ago, honestly, I would have said that half the size the fund is today would be its optimal size. But at £560m it is not restricting my ability to reposition or have the fund in the shape I want. 

“My style is very long term in the way I look at things, so stylistically I would hope we can run quite a bit more than this and not have the issues that would cause some funds problems if they were run by more active traders.”




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