FRANKLIN UK EQUITY INCOME FUND: Be bold – and keep buying, says fund chief Morton
Colin Morton of Franklin Equity
Having run investment fund Franklin UK Equity Income for the past 25 years, manager Colin Morton has experienced every possible twist and turn that a stock market can make – and responded accordingly, usually benefiting investors in the process.
But he has no idea what lasting impact the coronavirus will leave on the global economy and stock markets.
Although Morton, based in Leeds, has been using the market’s fall in recent days to buy into stocks he likes, he is unsure whether the sharp correction will be temporary or more sustained.
The only forecast he is prepared to make with any confidence is that if an investor buys into the UK market today, they should make money over the next three years.
The key, he says, is how long it will take to conquer coronavirus. If the problem is temporary, then there should be a strong bounce-back in shares.
But if it goes on for longer, he says it becomes a ‘different ball game’ and could cause a big slowdown in the global economy, impacting adversely on corporate profits.
Colin Morton says that if an investor buys into the UK market today, they should make money over the next three years
He believes interest rate cuts in the UK are inevitable – especially after the United States cut rates a few days ago – and could happen as early as this week.
The stocks he has been increasing his exposure to include industrials IMI and Johnson Matthey; oil giants BP and Shell; advertising company WPP and hospitality group InterContinental Hotels; mining monolith Rio Tinto; and insurers Legal & General and Phoenix.
Top Ten Holdings
Royal Butch Shell 4.5%
British Amertican Tobacco 2.9%
Imprerial Brands 2.5%
Rio Tinto 2.5%
Some, such as the insurers, have compelling yields above six per cent. Interestingly, Morton has not sold down any of the fund’s holdings, preferring to use some of the existing cash within the fund and new money coming in to finance the new purchases.
‘We’ve taken our cash position down from three to one per cent,’ he says. Morton describes UK Equity Income as a ‘plain vanilla, rather boring’ equity income fund.
Taking a swipe at Neil Woodford, he says the fund’s 52 holdings are all listed in the UK – there are no unquoted stakes and no overseas positions. No holding can represent more than five per cent of the fund’s value and it is automatically sold down if it breaches that level.
At the other end of the scale, no position can be less than one per cent.
‘We want to be sensible as managers,’ says Morton. ‘We don’t want to take huge positions in companies. A balanced portfolio is our preferred approach.’
Some 80 per cent of the £800 million fund’s assets are in FTSE 100 listed companies.
Income is a key driver of the fund, with Morton looking to deliver a yield that’s 10 per cent higher than that from the FTSE All Share Index.
Currently the annual yield is an attractive 5.3 per cent, compared to the FTSE All Share’s 4.7 per cent.
He says holding companies with an above average yield is a good discipline as an investment manager because it lends itself to a contrarian approach – buying companies that are out of favour and then holding on to them until they come good (leading to a drop in the yield).
Over the last five years, the fund has comfortably outperformed the FTSE All Share Index, generating a total return of 28 per cent. The ongoing annual charge is a competitive 0.53 per cent and dividends are paid quarterly.
‘Usually, at times like this,’ says Morton, ‘it has paid to be brave enough to buy into the market.’