Franklin UK Manager's Focus manager, Colin Morton, gives his view on Brexit, April 2016

Why the UK's longest standing equity income manager isn't worried about Brexit, April 2016

Ryan Lightfoot-Brown, analyst at Chelsea, recently met Colin Morton, the UK's longest standing equity income fund manager and co-manager of the Franklin UK Manager's Focus, which is on the Chelsea Selection.

Colin, what's the philosophy behind the Franklin UK Rising Dividends fund?

“I'm looking for stocks that are paying dividends, but also reinvesting in the business in order to grow in the future. Stocks will need to have reinvested an average of at least 35% of earnings over the past 10 years before I will consider them for the portfolio.

“I'm also looking for firms ideally with consistent dividend increases – in at least eight out of the past 10 years - with no decreases during that time. I do have a bit of a buffer for exceptions though, so this point won't necessarily rule out a company if its other attributes are attractive enough.

“So my process starts by removing from the universe all non-dividend paying stocks, those without rising dividends and those with a poor payout ratio.

“Stocks are analysed on the total value of the company and will have proven business models, long standing management teams, and free cash-flow built off solid balance sheets.

“What I will add is that I can only adopt this philosophy by keeping the fund out of the UK equity income sector and not being bound by the strict yield rules, but I think the added flexibility is well worthwhile.”

How is the fund currently positioned?

“Let's address the Brexit issue first: I haven't changed the portfolio in any way as the bookies only have a 30% likelihood of Britain leaving the European Union.

“If we did leave, I don't believe it would have a huge impact on the holdings we have. Our holdings tend to have long-term relationships with the European trade markets, so they are likely to continue to do so. There is a potential for clients to review these agreements, but at the moment I'm not too worried.

“The main issue will be after the vote and negotiating two-way trade agreements and discussing free movement of people. In order to deal with the EU, the UK will still have to agree with the main rules such as this, so Brexiters will not get what they think they will.

“Away from Brexit, I hold BP and Shell. The market is pricing in a dividend cut for both but I don't think that will happen, which makes the yield attractive.

“As mentioned previously, I also look for companies that are still investing in their businesses too, which is keeping the yields low for now, but they are less likely to cut these in future. In fact, they are likely to grow them. So we are buying into future growth.”

And what is your view of the economic environment?

“There are lots of things to be concerned about. The UK is quite a high risk economy, in my view, due to its exposure to quaternary industries (those that involve the intellectual services: research, development, and information) like housing exchanges, lawyers, estate agents, etc. Increasing house prices increases happiness of the general public though.

“Generally, companies are reluctant to spend on new capital because they are not seeing where global growth will come from. They are not confident enough, and governments are reinforcing the point that life is tough, therefore they are not willing to compete.”