Franklin Templeton enters UK fixed income as market turns rocky

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The fund manager who will head Franklin Templeton’s first UK fixed income products says the end of the 30-year bond bull market means investors should be looking at active managers in the space.

The Franklin UK Corporate Bond and Franklin UK Gilt funds, which have an AMC of 35bps and 25bps respectively, will be managed by David Zahn and Roderick MacPhee.

Alex Brotherston, head of UK retail Sales, says the double launch comes as investors remain sensitive to market volatility as uncertainty continues to dominate the investment agenda.

Zahn says investors need to reassess their allocation as a 30-year-plus bond market is nearing its end.

“Being passive over that period, you could argue that was fine, but now we’ve got a point where active management will add significant value. Now is the time for investors to look at who offers good active management in UK governments.”

Franklin Templeton’s UK gilt portfolio will be “really boring, really basic”, Zahn says. The fund can invest up to 20 per cent of its assets in other government bonds and may also invest in supranational and government-related issuers.

“It’s really easy to understand. It doesn’t have a lot of derivatives, it’s mainly cash bonds,” he explains.

Franklin Templeton’s global fixed income team is already “quite positive” on UK gilts, Zahn says. “We own them in our European portfolios that don’t have to own gilts.”

Despite warnings of a slowdown, fundamentals have strengthened since the UK’s decision to leave the EU, are providing attractive investment opportunities, Zahn says.

Regarding the UK credit fund, Zahn says the market is unique because almost half the issuers are global names, which the team already knows well from its products in the European bonds space.

On politics, Zahn says the team’s global expertise gives them an edge.

“Markets are more volatile now, the way you analyse things is slightly different because politics plays a slightly larger role than it has in the past. From that perspective having a more global view on a single country is quite beneficial.”

He adds that UK credit is the cheapest in the world right now.

Zahn is optimistic on Brexit arguing both sides will seek to reach an outcome that is mutually beneficial. He adds that countries such as the US, Australia and India that seek to do a trade deal with the UK give it a good bargaining hand as it goes into negotiations.

However, he expects negotiations to take a back seat as European countries, such as France and Germany, worry about national elections.

Brexit will create some volatility over the medium term though. “A lot of it will be driven by what you read in the press or what you hear from parties on both sides. If you can look through that there will be opportunities presented in the coming couple of years.”

The products are sub-funds of the Franklin Templeton Funds (FTF) Oeic range.