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.
Hello.
Good afternoon.
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?
That's correct, yes.
And that is pioneering within the space.
How have you got it so low?
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.
I suppose it begs the question, if you can do it, why can't everybody else do it?
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.
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?
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.
Does that mean we're due a correction then once that levels itself out?
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.
Colin, thank you very much.
You're welcome.
This is Emma Wall for Morningstar.
Thank you for watching.