Franklin Templeton’s Richard Bullas is shifting his small-cap fund down the market spectrum in a bid to find better opportunities and differentiate his portfolio.
Mr Bullas, who has run the £184m Franklin UK Smaller Companies fund for the past three years alongside Paul Spencer, has shifted its market-cap composition in recent months.
At the beginning of 2014 the portfolio held companies with an average market cap of £500m, but this has been reduced to an average of £320m.
“Last year we were invested in very much the middle part of our market spectrum, which ranges from £100m to £1bn,” Mr Bullas said.
“However, we’ve been tipping it slightly and now we are invested in companies that are in the bottom third of the market cap.”
The manager added that he had been finding this area a “rich hunting ground” and expected the trend to continue throughout the rest of this year and into 2016.
Mr Bullas has less competition in this area, because several smaller vehicles had become “quasi mid-cap funds” as they had grown in size, he said.
These funds have had to move up the market spectrum due to liquidity constraints as a result of inflows, “leaving a hole down the bottom end”, the manager explained.
Others have similar concerns. Morningstar recently downgraded Standard Life Investments’ Harry Nimmo due to concerns over the size of the stocks the small-cap manager held.
Mr Nimmo contested the suggestion that he had moved up the market-cap spectrum.
For his part, Mr Bullas said the smaller companies on which he was increasingly focusing had benefited from having a “domestic skew”, at a time when concerns over a Chinese and global growth slowdown had hit more international stocks.
“The UK is benefiting from a healthy labour market, interest rates that are going to be lower for longer and seeing real wage inflation coming through,” the manager added.
Another area Mr Bullas has been adding to is the industrial sector, which has been weak recently. He thought some of the stocks in that market had been “oversold” on concerns over emerging markets.
He is also scouring the energy and engineering sectors for opportunities. These areas took a beating when the price of oil plummeted.
But he thought this was a “cyclical issue” and some of these businesses were “sound and will recover into a better position because of their cost-cutting initiatives and merger and acquisition activity”.
Indeed, the industrial goods and services sector in which these stocks are included make up 42.1 per cent of the fund, its latest update shows.
But while he thought some stocks had oversold because of the low oil price, he said others were in real danger and was avoiding drilling firms, commodity producers and the mining sector.
The fund has performed strongly in the past three years, delivering 85.6 per cent against the average return of just 56.4 per cent for the IA UK Smaller Companies sector and the 51.6 per cent rise in the Numis Smaller Companies index, data from FE Analytics shows.
