Thinking globally and acting locally

Martin Cobb co-manages the Templeton UK Equity fund. He joined Franklin Templeton Investments in 2003. He is based in Edinburgh and his current research responsibilities cover the UK and Ireland. Before joining Franklin Templeton Investments, he was an investment manager with SVM Asset Management in Edinburgh, where he specialised in UK equities. Previously, he spent four years with Stewart Ivory as UK equity manager, having spent six years at Baillie Gifford on the UK equity and Japanese equities teams.

Q: How has the fund changed since its launch last March?

A: More of the portfolio is now invested in the FTSE 100 than it was 12 months ago. At launch, myself and Ken Cox, who is co-manager of the fund, had below 60% in large-caps, whereas now our weighting is nearer 70%. However, most of this exposure is in those companies at the bottom end of the FTSE 100. As a result of an increase in bid activity, a number of the small and mid-cap companies that we held became too expensive and as a result we reduced our exposure to them.

Q: How does the relationship work between yourself and Ken Cox?

A: Officially, we are listed as co-managers of the fund. However, I was brought into the group from SVM Asset Management 18 months ago for my UK experience. As a result, day-to-day I am the lead manager of the fund and Ken backs me up. Ken has been at the group since 1991 and manages the £82.2m Templeton Growth Oeic, so his experience is invaluable to me.

Q: How many companies are you invested in?

A: The average number of stocks in the portfolio since launch has been 40, and at present I hold 39. At this level, it’s my feeling that you can achieve adequate diversification, but still be able to back your judgments.

Q: Is the fund aggressively managed?

A: No. Our typical time horizon for holding a stock is five years. Owing to the initial bedding-down period of the fund, the turnover of stocks in its first 12 months was around 40%. However, our aim is to reduce the turnover to 20% per year.

Q: What is your attitude to risk?

A: Ignoring the FTSE All-Share index is my first attitude. Versus the average peer group tracking error of around 4.5%, we adopt a tracking error more in the region of 5-7%. However, despite this, the volatility of this fund, at 6.5%, is lower than the average fund in the sector, which stands at around 7%. We achieve this by not taking large positions in the FTSE 100 mega-caps.

It is also important in terms of risk to get to know the companies you are investing in, and you also need to be properly diversified. Typically, we hold between 2-3% in each stock in the portfolio.

Q: What is your investment universe?

A: As we ignore all Aim-listed stocks, we look at some 700 stocks listed on the FTSE All-Share. We also strip out all the investment trusts in the All-Share, which brings this universe down further to some 600 names.

Q: What differentiates this fund from all the other UK funds in the sector?

A: Our global approach to investing. At Templeton, including myself, there are 34 portfolio managers, all of whom have dual global sector analyst roles. My role, as well as being manager of this fund, is to analyse the global technology sector. The idea is that all the stocks that eventually go into the portfolio have to prove their credentials on a global level. Indeed, I can buy only those stocks that are placed by the analysts on our “global bargain list”.

At present there are some 70 UK names on this list and I cherry pick the best ideas from it. This global research process was first established in 1954 when Templeton launched its first global fund in America. This means investors are not just backing me; they are backing a team of 34 analysts who use a process that has been running for the last 50 years.

Another difference is our long-term approach to investing. Whereas the market seems to look out only over five months, we look at stocks on a five-year basis. At a time when market volatility is ever increasing over earnings volatility, this approach leads to more opportunities to take advantage of short-term volatility to buy stocks. It also allows us to avoid the short-term news, noise and emotion that can sway individual markets.

Q: Where are you finding value in the UK at present?

A: There are currently no obvious pools of value. At the 5000 level, the FTSE 100 looks fair value; but with no obvious sector bets to be making, this is a stockpicker’s market. That said, we are currently underweight the mortgage banks. This is not because we are think we are about to enter a bad debt cycle; it is just because mortgage volumes are going backwards at present. Meanwhile, we are overweight in the cyclical services sectors, such as media and retail.

I also have 5-6% of the fund’s assets in two housebuilding stocks, Bovis and Persimmon. This is not because I am a bull on the housing sector; it is purely from a stockpicking point of view. Indeed, as house prices have sold down in the last six months, you have seen a real differentiation in all the housebuilding companies.

Q: What is your investment philosophy?

A: To try to buy stocks at the time of maximum pessimism. The best time to buy the UK stockmarket in the last 20 years was at the time of the miners’ strike (in 1984/5). To do this, we look at what analysts are buying and selling and we also carefully look at valuations. One stock we have been a recent buyer of is Marks & Spencer. This is because, unlike Sainsbury’s, M&S has real asset backing, and Andrew Rose has proven he is an excellent retailer. Sainsbury’s is on our UK buy list, although I disagree with it being there as I am wary of its long-term structural problems.

Q: Have you played the oil sector in the last 12 months?

A: I do have holdings in BP and Shell, but has not been a big theme for the fund. The oil price in euros and sterling as not been as high as the dollar, so the actual oil stocks have not performed massively as a result of it going above $50. One company we do like and own is Wood Group, which helps BP and Shell dig holes in the ground. A gear on the oil sector, it is a deep-water drilling company and deep-water activity is picking up.

Q: How would you assess the overall state of the British stockmarket?

A: I am fairly agnostic on it. While it looks fair value and earnings numbers are rolling over, the prospects for long-term earnings growth for the market are definitely being scaled back at present. Additionally, while the market looks OK, it is not cheap. I can’t see the FTSE 100 going any higher than 5000; it has had a nice run, but it could now well come back a bit.

Q: Do you hold this fund?

A: Yes. One of the reasons I joined Templeton was that it invests in the way I like to; this means I feel comfortable holding it. Alongside holding some Franklin Templeton stock, this fund is my only investment.