Each week, aprofessional investor tells us where he'd put his money. This week: Colin Morton of Franklin UK Managers' Focus Fund.
UK investor sentiment lifted in August as monetary policy measures were initiated by the Bank of England and data was released that showed UK retail sales to have been better than expected. Mid- and small-caps have led the way recently as domestically oriented sectors continue to recover from the sell-off brought about by the UK's decision to leave the European Union after the June 2016 referendum.
As the "shop window" to the Franklin UK equity team, the Franklin UK Managers' Focus Fund is run as a collective effort with each of our fourUK managers bringing different skills and their best investment ideas to the table. The team employs a pragmatic, common-sense approach to investment, with decisions based on rigorous in-house valuation and risk modelling in order to select stocks likely to offer superior returns.
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Sage (LSE: SGE) is an example of a market-leading company we own in the fund. It provides small and medium-sized businesses with business management and services that are easy to use. Sage's software is used by approximately three million businesses, which rely on it for procurement, order management, sales, accounting and customer services.
Sage is in a secure financial position, with recurring revenues accounting for 80% of sales. It generates consistently high free cash flow and has a strong balance sheet with low debt. The company's high earnings visibility makes for a largely predictable business model that's straightforward to understand.
Another of our current holdings is Compass (LSE: CPG), the global market leader in food services, which is ranked number one or two in most of its key markets. An increase in organic revenue growth and operating efficiencies allows the business to invest in future growth, thus completing the virtuous circle.
Compass is exposed to long-term structural growth as outsourcing grows. Only around 25% of the catering market is currently outsourced, leaving plenty of scope for growth. The business has an extremely cash-generative business model that allows for a progressive dividend policy supplemented by share buybacks.
Finally, Clipper Logistics (LSE: CLG) provides logistics and handling services. It also offers warehousing, customs warehousing, added value, garment handling, secure logistics, e-fulfilment and transport services.
The business is extremely well-positioned to take advantage of the growth in e-commerce, as it offers its customers the full range of services that they require. In particular, Clipper's ability to handle returns adds substantial value. The company has achieved strong growth over the past three years with best in class margins and returns.
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