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City wire wealth manager retreat oct 2013 final Presentation Transcript

  • 1. UK Equity - Behind the Headlines and the Hype Franklin UK Opportunities Fund Franklin Templeton Funds For Professional Investors Only. Not for Distribution to Retail Investors. Ben Russon Fund Manager October 2013
  • 2. FRANKLIN UK OPPORTUNITIES FUND The Fund – June 2013 Onwards • • • • • Ben Russon, lead manager from June 2013 30-50 stocks Concentrated holdings of between 1.5% – 5% Large-cap bias, high quality, long-term investments Renamed – Franklin UK Opportunities Fund Franklin UK Opportunities Fund changed its name from Franklin UK Select Growth Fund on 30/09/2013. Franklin UK Select Growth Fund was launched on 17/10/2011 to receive the assets of the Rensburg UK Select Growth Trust. For Professional Investors Only. Not for Distribution to Retail Investors. 2
  • 3. FRANKLIN UK OPPORTUNITIES FUND 3 Investment Themes Debt & Deleverage UK Housing ‘Recovery’ Online Opportunities Demographics 30 – 50 Business Risk Balance Sheet Risk Management Risk Valuation Risk Stock Portfolio De-equitisation Stable Core A fundamental research approach focused on high quality companies Traditional Roll-out Models Savings and Investment US Housing & Construction For Professional Investors Only. Not for Distribution to Retail Investors.
  • 4. FRANKLIN UK OPPORTUNITIES FUND 4 The Case for an Unconstrained Approach From the 'great moderation' ... ... to a more volatile world 600 110 500 100 400 90 80 300 70 200 60 • Adopt unconstrained, flexible approach • Importance of compounding income for total returns • Focus on downside risk • Look beyond short-term sentiment Source: Franklin Templeton Investments as at 20/05/13. For Professional Investors Only. Not for Distribution to Retail Investors. Jan-13 Jan-12 Jan-11 Jan-10 Jan-09 Jan-08 Jan-07 Jan-06 Jan-05 Jan-04 Jan-03 Jan-02 Jan-01 Jan-00 Jan-99 Jan-98 Jan-97 Jan-96 Jan-95 Jan-94 Jan-93 Jan-92 Jan-91 Jan-90 Jan-89 Jan-88 40 Jan-87 0 Jan-86 50 Jan-85 100
  • 5. FRANKLIN UK OPPORTUNITIES FUND 5 Portfolio Overview Stable Core • Tobacco • Pharmaceuticals • Utilities • Travel & Leisure Structural Growth • Software • Media Special Situations • Support Services • Financial Services References to particular industries, sectors or companies are for general information and are not necessarily indicative of a fund’s holding at any one time. For Professional Investors Only. Not for Distribution to Retail Investors.
  • 6. Investment Themes For Professional Investors Only. Not for Distribution to Retail Investors.
  • 7. FRANKLIN UK OPPORTUNITIES FUND Stable Core 7 • Tobacco World market consumption excl. China, India, US Demographics Stock Example: • • Solid track record of optimising price/mix to drive earnings • Price/mix remains strong Strong market positions across relatively attractive geographies Focus on research and innovation to counteract negative forces £bn Developed Developing Total Cigarette Net Turnover 2008 2012 4.8 5.9 5.9 8.3 10.7 14.2 Cigarette volume split (2012) Developed 29% 71% Developing Source: British American Tobacco Investor Day Presentation, as of September 2013. Please see further information for notes on stock examples. Past performance is not a guide to future performance. For Professional Investors Only. Not for Distribution to Retail Investors. CAGR 5.4% 8.9% 7.4%
  • 8. FRANKLIN UK OPPORTUNITIES FUND 8 • Tobacco Stable Core Demographics Stock Example: Global drive brands % of total sales • • 20% 15% 2009 2010 2011 2012 2013HY 19% 19% 15% 11% 7% 8% 10% 10% 9% 9% 10% 5% 12x EV/EBIT, 7.5% FCF Yield Tobacco producers’ operating margins 2008 25% Strong management, strong cash generation, consistent earnings and further margin potential • Consistency of earnings growth Investor concerns – FX, regulation, illicit trade, e-cigarettes 2008 50 42.5 37.4 40 44.7 43.2 42.7 40.2 43.0 30.7 5% 0% 10% 11% 0% 30 12% -5% -5% 10% -2% 20 10 0 -10% EPS Growth FX Impact Source: British American Tobacco Investor Day Presentation, as of September 2013. World Fact Book & Marketing Finance. Please see further information for notes on stock examples. Past performance is not a guide to future performance. For Professional Investors Only. Not for Distribution to Retail Investors. 2012 33.0 36.4
  • 9. FRANKLIN UK OPPORTUNITIES FUND 9 Structural Growth • Media Online Opportunities Online-derived revenues growing in importance1 Stock Example: Reed Business Information: electronic revenue in proportion to total revenue 60% 46% 50% 40% 51% 54% 38% • Publisher and information provider operating in the science, medical, legal, risk and business sectors • Managing the transition from print to digital 30% 20% • Diversified across geographies and business sectors 10% 0% 2009 2010 2011 Electronic Revenue 2012 Reed Divisions: % digital revenue2 Division Digital Revenues Scientific, Technical & Medical 73% Risk Solutions 95% Business Information 59% Legal 79% Source: 1. Reed Elsevier Annual Report and Accounts 2012. 2. Reed Elsevier Interim Results 30 June 2013. Please see further information for notes on stock examples. Past performance is not a guide to future performance. For Professional Investors Only. Not for Distribution to Retail Investors.
  • 10. FRANKLIN UK OPPORTUNITIES FUND 10 • Media Structural Growth Online Opportunities Online-derived revenues growing in importance Stock Example: • Format Strong dividend growth and attractive valuation -5-7% -5-7% Advertising Print +7% Structural growth opportunities that benefit margins • Type Strong balance sheet • Reed Business Information: electronic revenue in proportion to total revenue Face to Face +2-3% Transactional Electronic Subscription +4% +5-6% 2011a 2012a 2013e 2014e 2015e Sales (£m) 6002 6116 6215 6341 6528 EBIT (£m) 1267 1384 1450 1526 1603 Margin (%) 21.1 22.6 23.3 24.1 24.6 Source: Reed Elsevier Interim Results 30 June 2013, Nomura Equity Research 26/07/13. Please see further information for notes on stock examples. Past performance is not a guide to future performance. For Professional Investors Only. Not for Distribution to Retail Investors.
  • 11. FRANKLIN UK OPPORTUNITIES FUND 11 • Travel & Leisure Structural Growth Premier Inn UK structural growth opportunity Independent sector in structural decline Total UK 679,000 rooms 682,000 rooms CAGR 17% 19% 21% +5.1% 23% 24% 25% +2.3% 60% 57% 54% -2.8% 2008 hotel market 686,000 rooms 2010 2012 Independents Other Branded Traditional Roll-Out Models Stock Example: • Self-funded expansion of successful concepts • Leading and developing the markets in which it operates • Benefitting from structural and market opportunities Budget hotel marketshare1 Budget Branded 2% 5% 3% Premier Inn 6% Travelodge 42% 12% Share of rooms has increased Holiday Inn Ibis 2008 Rooms* Share (%) 2010 2012 Jurys Inn 40,251 43,374 51,671 Days Inn 5.8% 6.4% 7.6% 30% Ramada Encore Source: Whitbread as of 03/07/13. 1. Companies, Exane BNP Paribas estimates. Please see further information for notes on stock examples. Past performance is not a guide to future performance. For Professional Investors Only. Not for Distribution to Retail Investors.
  • 12. FRANKLIN UK OPPORTUNITIES FUND 12 • Travel & Leisure Structural Growth Half of the growth opportunity comes from London Premier Inn rooms in London c. 20,000 2,500 8,066 5,179 Hub by Premier Inn • Plenty of potential domestic capacity Central London • Backing the management to execute 8,250 1,100 2,848 2,474 3,177 2,415 Premier Inn share Stock Example: 5,750 12,038 2012/2013 Traditional Roll-Out Models Greater London excl. Central London M25 belt • It works with coffee too… 3,500 2,911 Total including 2018 milestone* committed pipeline 6.0% 9.0% 13.0% Costa Coffee doubling system sales by 2018 c.33% System Sales (£m) 2500 2000 International System Sales Share 1500 20% 1000 c. 2,000 22% 1,300 650 1,005 500 0 2010/2011 2012/2013 2015/2016 2017/2018 Source: Whitbread as of 03/07/13, Preliminary Results Presentation 2012/2013. Please see further information for notes on stock examples. Past performance is not a guide to future performance. For Professional Investors Only. Not for Distribution to Retail Investors.
  • 13. Electionineering For Professional Investors Only. Not for Distribution to Retail Investors.
  • 14. FRANKLIN UK OPPORTUNITIES FUND Stable Core 14 • Utilities De-equitisation Stock Example: Electricity retail price versus benchmark cost (including margin) Returns do not support criticism of ‘profiteering’ • Market forces have produced some of the lowest energy bills in Europe for UK consumers • Little difference in rates of growth since 2000 • UK needs £100bn+ of new investment – ‘lights out’ is more than a media headline Forecast of UK winter capacity margin 20% 15% 10% % 5% 0% Reserve margin (w/o closures above opted-out coal) Reserve margin less c4.1GW CCGT mothballing Source: Centrica, Deutsche Bank Research, Credit Suisse, National Grid as of September 2013. Please see further information for notes on stock examples. Past performance is not a guide to future performance. . For Professional Investors Only. Not for Distribution to Retail Investors. 12/2014 9/2014 6/2014 3/2014 12/2013 9/2013 6/2013 3/2013 12/2012 9/2012 -5%
  • 15. FRANKLIN UK OPPORTUNITIES FUND 15 • Utilities Stable Core De-equitisation Components of household electricity bill in 2013 Network costs 23% Other supplier costs and margin 21% VAT 5% Energy and Climate Change Policies 14% RO 38% Wholesale energy cost 37% 7% CPF 6% • Smart Meters & Better Billing 1% Commodity prices and government policy largely explain rising energy bills • Ability to divert investment elsewhere or return cash to shareholders • Warm home discount 8% FITs 9% ECO 28% British Gas 2012 residential revenue split 8% EU ETS 10% Stock Example: Strong balance sheet, 7% FCF yield, 8x EV/EBIT 2012 segmental split of operating profit (%) 3% 24% 12% British Gas Residential 22% Network British Gas Business Environmental & Social Bristish Gas Services Fuel Costs 9% 6% Other Costs Profit Generation Gas Production 35% 11% 52% 11% Source: DECC, JP Morgan Europe Equity Research, company reports as of 26/09/13. Please see further information for notes on stock examples. Past performance is not a guide to future performance. For Professional Investors Only. Not for Distribution to Retail Investors. . Gas Storage Direct Energy
  • 16. FRANKLIN UK OPPORTUNITIES FUND Special Situations 16 • Home Construction UK Housing ‘Recovery’ Housing ticking up again • Housing transactions and house prices 3,000 40 30 20 10 0 -10 -20 -30 2,500 2,000 1,500 1,000 500 0 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Housing transactions (000,LHS) House prices (% yoy, RHS) A ‘proper’ correction never happened House price/earnings ratio (x) 6.0 5.5 5.0 4.5 4.0 3.5 3.0 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 House Price/Earnings Ratio Average Source: Oriel Securities and Franklin Templeton Investments as at 30/06/13. For Professional Investors Only. Not for Distribution to Retail Investors. Government policy very committed: • Funding for Lending Scheme • Help to Buy • Planning environment • Far reaching implications: • Bank balance sheets • Construction employment • Consumer confidence • It may get you re-elected
  • 17. FRANKLIN UK OPPORTUNITIES FUND 17 • Home Construction Special Situations UK Housing ‘Recovery’ Borrowing has got cheaper over last 12 months… Pricing of 2-year fixed rate mortgages by LTV (%)1 • • Pent up demand • Ripple effect and feel-good factor • Consumer confidence recovering Mortgage terms improving • % Mortgage availability increasing Variety of ways to gain exposure UK Consumer Confidence Index 01/06/2013 01/02/2013 01/10/2012 01/06/2012 01/02/2012 01/10/2011 01/06/2011 01/02/2011 01/10/2010 01/06/2010 01/02/2010 01/10/2009 01/06/2009 01/02/2009 01/10/2008 01/06/2008 0 -5 -10 -15 -20 -25 -30 -35 -40 Source: Bloomberg and Franklin Templeton Investments as at 30/06/13. 1. Source: Regulated Mortgage Survey, CML. For Professional Investors Only. Not for Distribution to Retail Investors.
  • 18. Appendix For Professional Investors Only. Not for Distribution to Retail Investors.
  • 19. FRANKLIN UK OPPORTUNITIES FUND 19 About Franklin UK Equity Team • UK equity specialists based in Leeds • Acquired by Franklin Templeton Investments in January 2011 • Strong and stable team – Average investment experience: over 20 years – Cover the entire market with specific areas of expertise • Ben Russon joined in April 2013 Source: Franklin Templeton Investments as at 30/06/13. The Franklin UK Equity Team was previously part of Rensburg Fund Management Limited. The company changed its name to Franklin Templeton Fund Management Limited on 17/10/11. For Professional Investors Only. Not for Distribution to Retail Investors.
  • 20. FRANKLIN UK OPPORTUNITIES FUND 20 Investment Parameters Franklin UK Opportunities Fund 30-50 Stocks 1.5%-5% Weightings Large Cap Bias • Unconstrained portfolio construction process • Focused portfolio of high conviction ideas • Emphasis on high quality, long-term investments For Professional Investors Only. Not for Distribution to Retail Investors.
  • 21. FRANKLIN UK OPPORTUNITIES FUND 21 Investment Process A broad top-down perspective on the outlook for economies and financial markets provides the framework for our bottom-up stock picking selection process Business Risk Balance Sheet Risk Management Risk Valuation Risk 30 – 50 Stock Portfolio A fundamental research approach focused on high quality companies For Professional Investors Only. Not for Distribution to Retail Investors.
  • 22. FRANKLIN UK OPPORTUNITIES FUND 22 Franklin UK Opportunities Fund Fund Details Management Ben Russon, Mark Hall, Colin Morton Asset Category UK Equity Investment Style Blend IMA sector IMA UK All Companies Benchmark FTSE All Share Index Launch Date 17/10/2011 Number of Positions 40 Portfolio Size £97 million ISIN SEDOL Bloomberg A(inc) GB00B45MQD36 B45MQD3 BWDAGGI LN W(acc) GB00B76GK996 B76GK99 FUKSGWA LN Z(acc) GB00B7F47W60 B7F47W6 FUKSGZA LN Source: Franklin Templeton Investments, as at 30/09/13. Franklin UK Opportunities Fund changed its name from Franklin UK Select Growth Fund on 30/09/2013. Franklin UK Select Growth Fund was launched on 17/10/2011 to receive the assets of the Rensburg UK Select Growth Trust. All fund performance data is based on the mid price of the Rensburg UK Smaller Companies Trust from its launch on 01/07/1991 to 30/09/2011 and the net asset value of the Franklin UK Smaller Companies Fund A(inc) shares thereafter. Holdings of the same issuer have been combined. For Professional Investors Only. Not for Distribution to Retail Investors.
  • 23. FRANKLIN UK OPPORTUNITIES FUND What Has Changed? • Ben became lead manager in June 2013 • Number of portfolio holdings now <50 • Standard holding size >1.5% weighting • Slight move up the market cap scale For Professional Investors Only. Not for Distribution to Retail Investors. 23
  • 24. FRANKLIN UK OPPORTUNITIES FUND 24 Market Cap Breakdown 31 March 2013 30 September 2013 FTSE 100 66.1% 78.3% FTSE 250 31.5% 17.4% Other 1.5% 1.6% Cash 1% 2.7% No. of stocks 66 40 Source: Franklin Templeton Investments as at 30/09/13. For Professional Investors Only. Not for Distribution to Retail Investors.
  • 25. FRANKLIN UK OPPORTUNITIES FUND What Remains the Same? • Many of existing stock names are consistent with this investment approach • Asset allocation and sector exposures broadly consistent • Mark Hall remains a key component of the investment team for the Franklin UK Opportunities Fund and the wider product suite For Professional Investors Only. Not for Distribution to Retail Investors. 25
  • 26. FRANKLIN UK OPPORTUNITIES FUND 26 Special Situations • Home Construction US Housing & Construction Sharp recovery in US house prices US home price appreciation. Year-over-year change 31 January 1988 - 30 April 20131 30% • Greater downturn and more established recovery than UK • Different supply/demand balance versus UK • Many corporates well positioned to benefit • 20% Challenged by recent moves in interest rates 10% 0% -10% -20% -30% 88 93 98 03 08 13 US recovery from a lower base and further advanced than UK US New home sales 1600 New Home Sales (Thousands) 1400 1200 1000 800 600 400 200 Jul-04 Jan-06 Jul-07 Jan-09 Jul-10 Jan-12 New Home Sales (Thousands) Jun-13 Source: Franklin Templeton Investments and Bloomberg US Census Bureau as at 30/06/13. 1. Source: S&P Case-Shiller Composite 10 Home Price Index For Professional Investors Only. Not for Distribution to Retail Investors.
  • 27. FRANKLIN UK OPPORTUNITIES FUND 27 Special Situations • Home Construction Stock Example: US and UK retail penetration (%)1 US UK 75 75 60+ 60 45 45 % 30 75 • Construction equipment rental business • 3 drivers – cyclical, structural and market trends 60 50 45 • High degree of operational leverage % 25 30 15 • Debate is centred upon the valuation 15 0 2000 2011 2014E US Potential US Housing & Construction 0 2012 Ashtead Group earnings and estimates2 2010 2011 2012 2013e 2014e Sales (£m) 834 919 1121 1345 1552 EBIT (£m) 65.5 101 175 281 347 Margin (%) 7.9 11.0 15.6 20.9 22.4 Source: 1. Kaplan Associates/Management Estimates. 2. Bloomberg as at 29/08/13. This is an example of an investment purchased pursuant to investment advice of Franklin UK Opportunities Fund; the investment may or may not be currently held by Franklin Templeton Funds. This is not a complete analysis of every material fact regarding an industry, security or investment and should not be viewed as an investment recommendation. The actions taken with respect to this investment, and its performance, may not be representative of other advice or investments. Factual statements are taken from sources considered reliable, but have not been independently verified for completeness or accuracy by the fund’s manager or its affiliates. These opinions may not be relied upon as investment advice or an offer for a particular security or as an indication of trading intent for any Franklin Templeton fund. Past performance is not a guide to future performance. For Professional Investors Only. Not for Distribution to Retail Investors.
  • 28. FRANKLIN UK OPPORTUNITIES FUND Important Information For professional investor use only, this document is not aimed at, nor intended for use by retail investors. Copyright © 2013 Franklin Templeton Investments. All rights reserved. This document is intended to be of general interest only and does not constitute legal or tax advice nor is it an offer for shares or invitation to apply for shares of the UK-domiciled OEIC, Franklin Templeton Funds OEIC (“the Fund”). Nothing in this document should be construed as investment advice. Franklin UK Opportunities Fund changed its name from Franklin UK Select Growth Fund on 30/09/2013. Franklin UK Select Growth Fund was launched on 17/10/2011 to receive the assets of the Rensburg UK Select Growth Trust. Stock examples shown are examples of an investment purchased pursuant to investment advice of Franklin UK Opportunities Fund; the investment may or may not be currently held by Franklin Templeton Funds. This is not a complete analysis of every material fact regarding an industry, security or investment and should not be viewed as an investment recommendation. The actions taken with respect to this investment, and its performance, may not be representative of other advice or investments. Factual statements are taken from sources considered reliable, but have not been independently verified for completeness or accuracy by the fund’s manager or its affiliates. These opinions may not be relied upon as investment advice or an offer for a particular security or as an indication of trading intent for any Franklin Templeton fund. Subscriptions to shares of the Fund can only be made on the basis of the current prospectus, the relevant Key Investor Information Document, accompanied by the latest available audited annual report and the latest semi-annual report if published thereafter, which can be found on our website or requested from the address below. The value of shares in the Fund and income received from it can go down as well as up, and investors may not get back the full amount invested. Currency fluctuations may affect the value of overseas investment. An investment in the Fund entails risks which are described in the Fund’s prospectus and in the relevant Key Investor Information Document. The Fund invests in a specific sector or geographical area and the returns may be more volatile than a more diversified fund. No shares of the Fund may be directly or indirectly offered or sold to nationals or residents of the United States of America. Shares of the Fund are not available for distribution in all jurisdictions and prospective investors should confirm availability with their local Franklin Templeton Investments representative before making any plans to invest. Opinions expressed are the author's at publication date and they are subject to change without prior notice. References to indices are made for comparative purposes only and are provided to represent the investment environment existing during the time periods shown. An index is unmanaged and one cannot invest directly in an index. The performance of the index does not include the deduction of expenses and does not represent the performance of any Franklin Templeton Group fund. Any research and analysis contained in this document has been procured by Franklin Templeton Investments for its own purposes and is provided to you only incidentally. For a free copy of the latest prospectus, and the relevant Key Investor Information Document , the annual report and semi-annual report, if published thereafter or for more information about any Franklin Templeton Investments’ fund, please contact: Franklin Templeton Investments, Telephone: 0800 305 306, Email: enquiries@franklintempleton.co.uk or write to us at the address below. Issued by Franklin Templeton Investment Management Limited (FTIML) Registered office: The Adelphi, 1-11 John Adam Street, London WC2N 6HT. FTIML is authorised and regulated by the Financial Conduct Authority. For Professional Investors Only. Not for Distribution to Retail Investors. 28