Will the FTSE 100 Rally Last?

Silver Rated Franklin fund manager Colin Morton on the benefits of Brexit on UK equities, whether sterling will stay low and his commitment to rock-bottom fund fees

Emma Wall 19 October, 2016 | 4:22PM
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Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Colin Morton, Manager of the Franklin UK Equity Income Fund.

Hello, Colin.

Colin Morton: Hello. Good afternoon.

Wall: So, I thought I'd start with something positive, better I say it than you, and that is, your fund fee is incredibly low. In fact, you've recently just changed the cap from 0.85% to 0.55%, haven't you, on a share class?

Morton: That's correct, yes.

Wall: And that is pioneering within the space. How have you got it so low?

Morton: What we've decided really is, for the core funds that we run and obviously, Equity Income Fund is very core, very large-cap orientated, lots of capacity in these funds, we'd also like to see it grow, we think this is maybe a more appropriate fee. Given all the developments that we've seen happening in the market over the last numbers of years, we have decided that with the invent of tracker funds, ETFs, a lot of more passive investment going on, we think we've got some very good performance.

But what we wanted there was give a really good fee on that as well. So, we've gone to a level which we think is incredibly competitive and hopefully, stops the debate, if you like, about fees from a Franklin point of view because people know that they are getting a price which is well below what you would call the average, if you like.

Wall: I suppose it begs the question, if you can do it, why can't everybody else do it?

Morton: Well, again, I'm not here to speak for the industry or other people in the industry. It's a decision that we've taken at Franklin on these core funds where we see that there is lots of capacity, where going forward longer term in a low inflation environment, low interest rate environment where returns for clients maybe will be a bit lower than it had been in the past, these fees to us make a lot more sense and that's the reason why we've done it. And whether the people in the industry decide to follow, we will see.

Wall: I mean, we are entering a slower-growth, lower-growth environment, but looking at fund performance this year, it's actually done incredibly well, thanks in part to Brexit. I suppose the question is, how long can that continue? Is this sort of inflated values real or is it just a puffed-up?

Morton: Well, it's a very difficult thing to answer because you can see the logic about why what has happened has happed. I mean, basically, obviously, we went into the vote on European membership. Everyone just about out there was expecting us to remain and we got this surprised Brexit vote. And the one thing, if you like, the experts did get very right has been a devaluation of sterling. So, sterling has fallen by 20% against both the euro and the dollar since before Brexit. And of course, as a result of that the FTSE 100 Index, which has got a massive overweight bias, has benefited massively from that devaluation.

So, if you like, there has been a little bit of, if you want to call it a false situation, whereas all of those companies that derive significant proportions of their earnings from outside the U.K. got this translational sterling benefit and as a result, share prices have risen sharply. So, if you had said to me at the beginning of the year before Brexit, I had been very much in this camp of relatively lower returns for quite a long time, you can't have U.K. growth.

If you've got a world where inflation is very low, interest rates are very low, growth and bond yields are low, it would be wrong to expect very high equity market returns. And until the end of June we were really tracking for a reasonable year, but nothing what I would call out of the ordinary. And obviously, the Brexit vote, particularly for those people like me who have got overseas exposure and a large-cap bias, we've ended up getting a real benefit from that.

Wall: Does that mean we're due a correction then once that levels itself out?

Morton: Well, that's a difficult thing really because you can see why the stocks have done what they have done and again, the view on the currency becomes very difficult. Now, I'm not a currency expert or I'm not here to predict what's going to happen over the next few years. But obviously there has been a tangible benefit certainly from things like dividend payments. A lot of companies in the U.K. announced their dividends in dollars and cents and euros. So, as a U.K. shareholder you've just been given a very nice dividend increase. So, if the currency stays at these sort of levels, you can understand why we've had this move up.

Of course, the danger is, is if the pound did start to strengthen and people got more confidence over Brexit and over the U.K.'s plans if they find any, the reality is, these stocks will then maybe start to weaken. So, it's a very difficult thing to answer. You can understand why they have gone up and whether it's sustainable or not over the longer term to some extent depends on where these currencies bottom out and remain.

Wall: Colin, thank you very much.

Morton: You're welcome.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Franklin UK Equity Income W Acc2.38 GBP-1.33Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar