FTF Martin Currie UK Mid Cap: August 2024 fund update

• Richard Bullas is an experienced UK small and medium-sized companies investor and benefits from the support of a well-resourced team

• The fund invests in medium-sized companies, often considered the ‘sweet spot’ between company growth potential and maturity

• The fund’s performed better than its benchmark index since Bullas became its manager in 2013

• This fund features on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

FTF Martin Currie UK Mid Cap aims to deliver income and capital growth over the longer term. The managers invest in medium-sized companies within the FTSE 250, often considered the ‘sweet spot’ between company growth potential and maturity. It’s home to some great domestic companies and also those that do business internationally. This fund could be a useful option as part of the UK portion of an adventurous portfolio or work well alongside funds investing in large or higher-risk smaller UK businesses to achieve broader UK stock market exposure.

Manager

Richard Bullas has co-managed the FTF Martin Currie UK Mid Cap fund since 2013 and took over as lead manager in July 2020. He began his career in accountancy audit before moving to Aviva as an analyst. He joined Rensburg Fund Management, which later became Franklin Templeton Fund Management, in 2000. Bullas became a fund manager in 2006 and has covered the UK small and medium sized companies’ sector for most of that time.

Bullas is also involved in the FTF Martin Currie UK Smaller Companies and FTF Martin Currie UK Managers Focus funds. There are some similarities between these funds, and we think he’s able to comfortably manage his commitment to each.

Bullas has the support of a strong team at Martin Currie, and they collectively have a lot of experience. We believe the fund is in good hands under Bullas. He has a strong track record investing in smaller companies, and we believe investing in medium-sized companies is a natural and achievable extension of his abilities.

Process

Bullas and his team hunt for businesses with strong growth potential. Their process centres around two key pillars – quality and valuation. This sets a high bar for companies to make it into the fund and aims to mitigate three key risks: business, financial and management.

In terms of quality, the team looks for companies whose earnings are sustainable over the long run, such as those with brand power and hard-to-replicate advantages. Management teams are essential to a company’s success so they must have a strong track record of delivery and be incentivised appropriately. These companies also need to be financially robust, so they look for companies that are highly cash generative and avoid those with lots of debt.

Once the team has evaluated a company’s quality, they assess how attractively it’s valued. As long-term investors they want to understand the stock’s upside and downside potential. The team typically forecast the potential share price returns over the next three to five years. If the share price is attractive enough to benefit from these returns, they will invest.

This fund invests in a relatively small number of companies, typically between 30-50. There are currently 30 companies in the fund. This means each one has the potential to make a meaningful difference to performance, both positively and negatively, which can increase risk. Companies are sold if they graduate into the larger FTSE 100 by growing in value. While the fund mostly invests in medium-sized companies, Bullas can also invest in smaller companies, which adds risk.

In recent months, the manager has added a new investment in renewables infrastructure specialist Foresight Group. Bullas expects the business to be a beneficiary of increased allocations to private markets. He also added Coats, the threads specialist to the fund, with the manager optimistic that the business is seeing an improving market backdrop and a more favourable business cycle.

Culture

Bullas and the team are based in Leeds. They have a collegiate culture, with lots of collaboration and support for each other. The team is part of Martin Currie, an asset manager within the wider Franklin Templeton group, so they enjoy the resources that come with being part of a large organisation. The Leeds office operates like a boutique fund group though, as the managers are given the freedom to invest largely without interference.

ESG Integration

Franklin Templeton was previously a laggard on ESG (Environmental, Social and Governance) integration. But since its integration with Martin Currie (as part of the broader Legg Mason acquisition), the group has made significant strides forward, in part because of its ability to leverage Martin Currie’s expertise. Responsibility for carrying out ESG analysis sits with individual analysts and portfolio managers, and all stock research must consider the material and relevant governance, social and environmental factors that could impact a company’s ability to generate sustainable returns.

The firm offers a range of strategies that take a more hands-on approach to ESG, thematic investing and impact. All investment teams have access to a dedicated Global Sustainability Strategy team, which tracks emerging themes, shares industry best practice and conducts independent analysis. There is a firm-wide commitment to avoid controversial weapons.

Franklin Templeton fund managers and analysts engage with executives and board members of the organisations they invest in to review issues they believe are material to the firms’ long-term prospects. They also vote at shareholder meetings wherever possible, informed by three third-party voting advisors. The firm publishes regular ESG-focused articles and a comprehensive annual stewardship report. It also outlines its voting activity on a fund-by-fund basis, although voting rationale is not available.

Cost

The fund usually has an annual ongoing charge of 0.82%, but with a 0.20% saving it’s available to HL clients for 0.62%. The HL account charge of up to 0.45% per year also applies, except in the HL Junior ISA, where no account charge applies.

Performance

The fund has performed well since Bullas became co-manager in September 2013. From then until the end of July 2024, the fund has delivered returns of 99.15%*, compared with 89.00% for the FTSE 250 ex Investment Trust index. Past performance isn't a guide to the future.

Over the last 12 months the fund hasn’t kept up with its benchmark though. Over this period, the fund has delivered a return of 15.36%, lagging the 18.47% return from the FTSE 250 ex IT index. Our analysis suggests that over this period, the fund’s investment in industrial business Genuit Group and housebuilder Redrow were among the biggest contributors to performance. In contrast, the investments in retailers Pets at Home Group and Watches of Switzerland were among its worst performers.

Bullas is optimistic that a period of political stability in the UK should provide businesses and investors with confidence and improve sentiment towards our domestic market. He believes housebuilders, and their supply chains, are one area which could benefit. In particular, those focused on affordable housing which is particularly aligned with the government’s objectives.

We think Bullas has the experience, skill and team support to deliver good long-term returns to patient investors, although there are no guarantees.