Why Wouldn’t You Invest in UK Mid Caps?
Paul Spencer Portfolio Manager Franklin UK Mid Cap Fund
For Professional Investor Use Only. Not for Distribution to Retail Investors. FRANKLIN UK SMALLER COMPANIES FUND
Mid-Cap Out-Performance Over the Last Decade
Ten Years to 30 April 2015
400 +368.9% 350
300 250 +259.6% 200 150 100 +108.5% Performance % 50 0 -50 Apr 05 Oct 05 Apr 06 Oct 06 Apr 07 Oct 07 Apr 08 Oct 08 Apr 09 Oct 09 Apr 10 Oct 10 Apr 11 Oct 11 Apr 12 Oct 12 Apr 13 Oct 13 Apr 14 Oct 14 Apr 15 FTSE 100 TR Index FTSE 250 Ex-IT TR Index Franklin UK Mid Cap Fund - W (ACC)
Source: © 2015 Morningstar UK. All rights reserved. Total return in GBP over 10 years to 30/04/15. Performance details provided are in GBP, include the reinvested dividends, net of basic rate UK tax and management fees. The Franklin UK Mid Cap Fund launched on 17/10/11 to receive the assets of Rensburg UK Mid Cap Growth Trust, a unit trust. Fund performance data is based on the mid price of the Rensburg UK Mid Cap Growth Trust from its launch on 12/07/1999 to 30/09/2011 and the net asset value of the Franklin UK Mid Cap Fund A(inc) shares thereafter. The W (Acc) GBP share class launched on 31/05/2012. Performance data prior to that date is for the A (Inc) share class which has higher annual charges. Past performance is no guarantee of future performance. For Professional Investor Use Only. Not for Distribution to Retail Investors. Mid Caps Outperformed in Seven of Last Ten Years
FTSE 250 Index v’s FTSE 100 Index Calendar Year Performance since 2005 52.8%
32.1% 34.9% 29.7% 27.3% 28.4% 28.7% 20.8% 18.7% 14.4% 12.6% 15.2% 7.4% 10.0% 8.3% 0.7% 2.8%
-3.7% -2.2% -10.3%
-28.3% -38.4%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 - YTD
FTSE 100 Index TR FTSE 250 ex-IT TR Index
For Professional Investor Use Only. Not for Distribution to Retail Investors. A Section of the Market Not to be Overlooked
BREADTH STRENGTH SIGNIFICANCE • 210 companies* • Total market cap: £360bn • 16% of the FTSE All- • Market cap. range • Operating profits: Share Index £750m - £3.7bn - £30bn • Quarterly reviews - UK: 55%/Overseas: 45% • Debt: £52bn
Source: Franklin Templeton Investments as at 30/04/15. *FTSE 250 Ex-IT Index. For Professional Investor Use Only. Not for Distribution to Retail Investors. A Diverse Investment Universe
FTSE 250 Index Industry Sector Breakdown SECTOR DIVERSITY • More than thirty discrete Engineering & electronics….8% sectors Real estate…………………..7% • Top ten sectors account Support services…………….7%
for only 55% Oil, gas & energy……………6%
Retailers……………………...6%
Housing…………………...….5%
Specialist lending…………....5%
Financial services…………...5%
Wealth management………..4%
Pubs and dining……………..3%
Other sectors…………...... 45%
For Professional Investor Use Only. Not for Distribution to Retail Investors. Highly Differentiated From FTSE 100 Index
FTSE 100 Index Top Six Sectors v’s FTSE 250 Index
FTSE 250 Index Total: 5.3% 0.7% 2.0% 1.9% 3.1% 5.5% 13.4% 9.1% 7.1% 13.0% 14.3% 5.7%
FTSE 100 Index Total: 55.1% Oil & gas Banks Pharmaceuticals Mining Telecoms Tobacco FTSE 100 FTSE 250
Source: Franklin Templeton Investments as at 30/04/15. *FTSE 250 Ex-IT Index. For Professional Investor Use Only. Not for Distribution to Retail Investors. A is for ‘Acquisitions’
M&A Remains Key Potential Driver
M&A as % of Index Market Cap Equity Yields and Credit Spreads
10% 14% 4% 9% 12% 2% 8%
7% 10% 0% (%) Spread
6% 5% 8% -2%
Yield (%) 4% 6% -4% 3% 2% 4% -6% 1% 0% 2% -8% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14
FTSE 100 FTSE 250 Small Cap FTSE 250 Earnings Yield BBB Yield Spread (EY - BBB, RHS)
Source: DataStream & Liberum Capital as of 01/01/15. For Professional Investor Use Only. Not for Distribution to Retail Investors. B is for ‘Buybacks and Dividends’
Scope for Further Cash Support
Small-Mid (SMID) Buybacks FTSE 250 Dividend Cover
£7bn 3.6x 3.4x £6bn 3.2x £5bn 3.0x £4bn 2.8x
£3bn 2.6x 2.4x £2bn 2.2x £1bn 2.0x
£0bn 1.8x '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 2000 2000 2001 2002 2002 2003 2004 2004 2005 2006 2006 2007 2008 2008 2009 2010 2010 2011 2012 2012 2013 2014 2014 FTSE 250 FTSE Small Cap
FTSE 250 aggregated cover (12m fwd, %) FTSE 250 median cover (12m fwd, %)
Source: DataStream & Liberum Capital as of 01/01/15. For Professional Investor Use Only. Not for Distribution to Retail Investors. C is for ‘Consumer-Facing’
Thicker Wallets on Oil, Food and Wages • Falling prices leading to more disposable income - benefitting consumer-oriented businesses
Energy Costs1 Food Inflation2 Real Wage Inflation (%YoY)3
120 16% 110 5% 4% 100 12% 90 3% 2% 80 8% 1% 70 4% 0% 60 -1% 50 0% -2% 40 -3% -4% Jan '14 Apr '14 Jul '14 Oct '14 Jan '15 Apr '15 14 -4% - '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 -5% WTI crude Gasoline Unleaded petrol Dec UK CPI (YoY %) UK CPI - Food (YoY %) '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15
Source: DataStream & Liberum Capital. 1. Data as of 5/06/15. 2. Data as of 15/04/15. 3. Data as of 27/02/15. For Professional Investor Use Only. Not for Distribution to Retail Investors. Valuations
2014A 2015E 2016E 2017E P/E FTSE '80' 17.7 17.6 16.0 14.3 FTSE '20' 14.1 16.8 14.6 13.0 FTSE 250 Ex-IT 19.8 18.1 16.2 14.5
Dividend Yield FTSE '80' 2.8% 3.1% 3.3% 3.4% FTSE '20' 4.0% 4.3% 4.5% 4.5% FTSE 250 Ex-IT* 2.7% 2.8% 3.1% 3.3%
Source: DataStream & Liberum Capital; as of 01/06/15. Note: we use the parent aggregation method. FTSE 80 equals 80 smallest companies in FTSE 100 Index.. For Professional Investor Use Only. Not for Distribution to Retail Investors. Franklin UK Mid Cap Fund For ‘Pure’ FTSE 250 Exposure
Business, Focused portfolio balance sheet and of currently 36 management investments strength
Long-term horizons Strong, consistent and contrarian track record positions
For Professional Investor Use Only. Not for Distribution to Retail Investors. Why Wouldn’t You Invest in UK Mid Caps?
Structurally higher Core UK exposure growth
Diverse investment Specific mid-cap universe drivers
Highly differentiated Long-term from FTSE 100 outperformance
For Professional Investor Use Only. Not for Distribution to Retail Investors. Important Information
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