franklin uk smaller companies fund citywire event sept '13 final

For Professional Investor Use Only. Not for Distribution to Retail Investors.

Opportunities in UK Small Caps

Richard Bullas

Co-Fund Manager, Franklin UK Smaller Companies Fund

Franklin Templeton Funds

September 2013

1

Agenda

• The Opportunity in UK Smaller Companies

• Investment Strategy & Process

• Portfolio Positioning

• Appendix

FRANKLIN UK SMALLER COMPANIES FUND


For Professional Investors Only. Not for Distribution to Retail Investors.

The Opportunity in UK Smaller

Companies


Small Cap Out-Performance Over the Last 10 Years

Source: Morningstar Direct®. © 2013 Morningstar UK. All rights reserved as at 31/07/13, total return in GBP over 10 years.

Pe

rfo

rma

nc

e in

GB

P (

reb

as

ed

to

10

0)

100

150

200

250

300

350

400

Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13

NCSX Ex Investment Trusts TR Index FTSE 100 TR Index

3

+248%

+148%



Superior Performance

4

IMA Asset Class Performance – 10 Years

Source: Franklin Templeton Investments as at 31/07/13.

Cu

mu

lative

Retu

rn G

BP


0

50

100

150

200

250

300


Under-Owned Shrinking Asset Class

5

UK Smaller Companies FUM

Source: IMA and Franklin Templeton Investments as at 30/06/13.

Fu

nd

s U

nd

er

Ma

na

ge

me

nt

in t

he IM

A U

K

Sm

all

er

Co

mp

an

ies

Se

cto

r (£

bn

) M

ark

et p

rice o

f the N

um

is In

de

x


0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

0

2

4

6

8

10

12

14

16

FUM £'s Numis index


6

De-equitisation in Small Caps

1255 1271 1263

1085 1024

945 858

731 662

583 506 509 495

448 430 422 389

811

155 100

- 100

100

300

500

700

900

1100

1300

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

Start year

Start year constituents Cumulative loss: deaths less IPOs

Cumulative loss: net transfers to AIM Cumulative gain: change in cutoff

Source: Numis as at 16/01/13.

Number of constituents in the Numis Smaller Companies Index



7

Small Caps are Not Expensive

Source: Bloomberg as at 30/06/13.

Market P/Es by Market Cap Band


FTSE 100 FTSE 250 FTSE Small Cap

0

2

4

6

8

10

12

14

16

18


8

Small Caps are Under Researched

Source: Bloomberg as at 30/06/13.

Average Analyst Coverage

29

24

18

11

75

32

0

5

10

15

20

25

30

35

£10bn+ £5bn-£10bn £1bn-£5bn £500m-£1bn £250m-£500m £100m-£250m £50m-£100m £25m-£50m

Number of Analysts



Investment Strategy and Process

10

Investment Strategy



To create a high conviction portfolio of undervalued companies by primarily investing in the constituents of the Numis Smaller Companies Index (NSCI)

• To have a portfolio of 40/50 investments over the longer term

40-50 Stocks

• Minimum size investment c.1.5% and a maximum position of c.5% of the funds AUM

1.5%-5% Weightings

• Concentrate on investments with a market cap of between £100m & £1bn

£100m-£1bn Focus

11

Investment Process



Business Risk

Balance Sheet Risk

Management Risk

Valuation Risk

A broad top-down perspective on the outlook for economies and financial markets provides the framework for our bottom-up stock picking selection process

A fundamental research approach focussed on established quality smaller companies


Portfolio Positioning


13

Three Investment Categories


High Quality Growth

• Strong organic growth opportunities and growing end markets

• Structural growth companies with a strong market position and a record of delivery

Undervalued & Overlooked

• Under-appreciated or overlooked companies

• Valuation fails to reflect strength of company or profit potential

Cyclical & Recovery

• Good quality companies, well- managed during a challenging period

• Well-placed to benefit from either self help or end market recovery

A balanced and well-diversified portfolio with investments typically falling into

one of three categories


14

High Quality Growth


• Strong industry position in a structural growth market as global customers

transition from analogue to digital printing

• Rapid adoption of digital inkjet printing by Chinese ceramic manufacturers is

driving strong earnings growth

• Technological advantage over competition due to Research and

Development investment

• Strong financials, strong cash flow and net cash on the balance sheet

• Valuation fails to reflect the strong sales and earnings outlook

Other examples: RWS, Ted Baker, Cranswick

Xaar is the global independent market leader in the

manufacture of industrial digital inkjet printheads.


15

Undervalued & Overlooked


• Defence and Dairy divisions are world class and market-leading

• Investment in R&D has produced new products which are driving future

demand

• International growth opportunities for both divisions

• Good visibility from 10-year sole source contract with US DoD

• Dominant market position in Dairy with upside from the industrialisation of

farming in China

• The rating fails to reflect the quality of the business and its growth potential

Other examples: Gooch & Housego, Entertainment One, Ricardo

Avon is an innovative engineering group specialising in respiratory, defence and dairy markets.


16

Cyclical & Recovery


• Well managed during a difficult market environment taking their market share to 27%

• An increase in UK housing transactions will be a catalyst for increased tile demand

• Well invested store base and high operational gearing will translate into strong earnings growth

• Valuation fails to reflect this profit recovery potential.

Other examples: Lavendon, LSL Property Services, Robert Walters

The UK’s Leading independent tile retailer with over 320 stores nationwide.


Franklin UK Smaller Companies Fund Performance

3 Months 6 Months

11 Months

(since

restructure) 1 Year 3 Years 5 Years

Franklin UK Smaller Companies

Fund W(acc) 13.19% 23.75% 44.19% 46.46% 47.52% 34.38%

Numis Smaller Companies Ex.

Investment Trusts Index 8.95% 16.14% 35.13% 40.43% 72.06% 114.09%

IMA UK Smaller Companies Sector

Average 7.10% 12.49% 27.89% 31.74% 63.62% 80.37%

Quartile 1 1 1 1 4 4

Past performance is not a guide to future performance. Highlighted data shows performance of the Fund since restructuring ended on 3 September 2012.

Source: Franklin Templeton Investments and Morningstar as at 31/07/13. © 2013 Morningstar, Inc. All rights reserved. Performance details provided are in GBP, include the reinvested

dividends net of basic rate UK tax and are net of management fees. The Franklin UK Smaller Companies Fund launched on 17 October 2011 to receive the assets of Rensburg UK

Smaller Companies Trust, a unit trust. All fund performance data is based on the mid price of the Rensburg UK Smaller Companies Trust from its launch on 01/07/1991 to 30/09/2011

and the net asset value of the Franklin UK Smaller Companies Fund A(inc) shares thereafter. The Fund offers other share classes subject to different fees and expenses, which will

affect their performance. Please see the prospectus for details.


17


Appendix

• UK equity specialists based in

Leeds

• Acquired by Franklin Templeton

Investments in January 2011

19

About Franklin UK Equity Team


Source: Franklin Templeton Investments as at 31/07/13. The Franklin UK Equity Team was previously part of Rensburg Fund Management Limited. The company

changed its name to Franklin Templeton Fund Management Limited on 17/10/11.


• Strong and stable team

– Average investment

experience: over 20 years

– Cover the entire market

with specific areas of expertise

• Ben Russon joined in April 2013


Richard Bullas

Richard Bullas, Research Analyst and Fund Manager is Joint Manager of the Franklin UK Smaller Companies

Fund and is also Joint Manager of the Franklin UK Managers’ Focus Fund.

Richard joined Franklin Templeton Investments when it acquired Rensburg Fund Management in January 2011,

having previously worked at Rensburg Fund Management for over 11 years since joining the team in January

2000. Prior to joining Rensburg, Richard worked at AVIVA as a Market Analyst in the life and pensions team.

Richard holds a B.Sc (Hons) degree in business and management studies from Bradford University School of

Management. He holds the IMC (Investment Management Certificate) and is a Chartered MCSI (Chartered

Institute for Securities and Investment)

Research Analyst, Fund Manager

Franklin Templeton Fund Management Limited

Location: Leeds, UK

20 FRANKLIN UK SMALLER COMPANIES FUND


Paul Spencer

Mr Spencer is Joint Manager of the Franklin UK Smaller Companies Fund and Lead Manager of the Franklin UK

Mid Cap Fund. A member of the Franklin UK Equity Team, he specialises in UK mid-cap equity analysis and

investment.

Paul joined Franklin Templeton Investments when it acquired Rensburg Fund Management in January 2011.

Paul started his investment career in 1987, when he joined BWD Rensburg. Within the next eight years, Paul

progressed through the ranks becoming Head of Research. In 1991, he assumed responsibility for the BWD UK

Smaller Companies Trust leaving in 1995 to join Granville Davies Limited as a Director and Small and Mid Cap

analyst. In 1999, Paul joined TD Waterhouse where he was Head of Research, specialising in small and mid-

cap investment analysis. He returned to Rensburg in 2006 to manage the Rensburg UK Mid Cap Growth Trust,

now called the Franklin UK Mid Cap Fund.

During his tenure as Fund Manager of this Fund, he has received a number of awards for investment excellence

including the Moneywise Best UK All Companies Fund in 2008, 2009, 2010, an award from Money Observer for

the Best UK Small/Mid Cap Fund 2009 and Best UK All Companies Fund over three years from Lipper in 2009.

Paul holds a BA (Hons) Economics from Nottingham University. He is a Fellow of the Securities Institute (FSI).

Vice President, Fund Manager

Franklin Templeton Fund Management Limited

Location: Leeds, UK

21 FRANKLIN UK SMALLER COMPANIES FUND


22

Portfolio Repositioned by September 2012


• Paul Spencer & Richard Bullas appointed co-portfolio managers on 25 June 2012

• Initiated a complete review of the portfolio and each holding

• New investment process, strategy & style implemented

• Sold 33/59 stocks, c.40% AUM, including;

• Mining and oil & gas stocks (24% AUM, mostly gold, pre-production, high risk)

• <1% weightings (14 stocks, low conviction)

• <£100m mkt cap (30% AUM, illiquid, unprofitable)

• Overseas listed (12% AUM, esoteric, high risk)

• Reduced AIM exposure (42%, high risk)

• Bought/Added;

• To positions that met our investment criteria

• Invested in c.15 new companies

• Restructuring complete from 1st September 2012


23

Portfolio Positioning

Top 10 Overweights Top 10 Sectors

As at 31 July 2013


Source: Franklin Templeton Investments as at 31/07/13. Weightings as percent of equity. Percentage may not equal 100% due to rounding. Information is historical and may not reflect current

or future portfolio characteristics. All portfolio holdings are subject to change.

The Ten Largest Holdings represent the ten largest holdings of the fund as of the date indicated. These securities do not represent all of the securities purchased, sold or recommended for

advisory clients, and the reader should not assume that investment in the securities listed was or will be profitable. All portfolio holdings are subject to change. Holdings of the same issuer

have been combined. Weightings as a percentage of total. The portfolio manager for the fund reserves the right to withhold release of information with respect to holdings that would otherwise

be included in a top 10 holdings list.

Sector Fund

Weighting Relative to NSCI

Support Services 16.9% +1.1%

Software & Comp. Services 7.1% +4.5%

Household Goods 7.1% +4.5%

General Retailers 6.2% -2.4%

Elect. & Electrical Equip. 6.2% +3.7%

Real Estate 5.5% +1.1%

Aerospace & Defence 5.4% +2.9%

Real Estate Investment Trusts 4.7% +1.8%

Industrial Engineering 4.5% +2.7%

Financial Services 4.5% -3.2%

Stock Fund

O/Weight

Topps Tiles PLC 3.9%

Xaar PLC 3.3%

RWS Holdings PLC 2.9%

Avon Rubber PLC 2.9%

LSL Property Services PLC 2.7%

Polar Capital Holdings PLC 2.6%

Gooch & Housego PLC 2.5%

Ted Baker PLC 2.5%

Lavendon Group PLC 2.4%

Telford Homes PLC 2.4%


24

Asset Allocation

0%

5%

10%

15%

20%

25%

30%

35%

£1Bn+ £500m-

£1Bn

£250m-

£500m

£100m-

£250m

£50m-

£100m

% F

und

Market Cap Bands


Portfolio Distribution & Asset Allocation as at 31 July 2013

Source: Franklin Templeton Investments as at 31/07/13. Information is historical and may not reflect current or future portfolio characteristics. All portfolio holdings are subject to change.

Asset Allocation % Fund NSCI Index

Weight

FTSE 250 51.5% 77.7%

FTSE SmallCap 21.5% 16.7%

FTSE Fledgling 0.0% 1.2%

AIM 20.1% 0.1%

Other 6.9% 4.4%

No. of stocks 45 379

The Numis Smaller Companies Index

25

Source: Franklin Templeton Investments as of 30/06/13.

• Formerly the Hoare Govett Smaller Companies Index

• Bottom 10% of the main UK-listed market by value (rebalanced annually)

• 80% FTSE 250, 15% FTSE Small Cap and 5% others

• c.400 Companies (excluding investment trusts)

• £1.5bn largest market cap (as at 31 December 2012 cut-off point)




Franklin UK Smaller Companies Fund

Fund Details

Management Paul Spencer, Richard Bullas

Asset Category UK Equity

Investment Style Blend

IMA sector IMA UK Smaller Companies

Benchmark Numis Smaller Companies Ex. Investment Trusts TR Index

Launch Date 17/10/2011

Number of Positions 45

Portfolio Size £56.4 million

FRANKLIN UK SMALLER COMPANIES FUND 26

Source: Franklin Templeton Investments, as at 31/07/13. The Franklin UK Smaller Companies Fund launched on 17 October 2011 to receive the assets of Rensburg UK Smaller Companies

Trust, a unit trust. All fund performance data is based on the mid price of the Rensburg UK Smaller Companies Trust from its launch on 01/07/1991 to 30/09/2011 and the net asset value of

the Franklin UK Smaller Companies Fund A(inc) shares thereafter. Holdings of the same issuer have been combined.


Important Information For professional investor use only, this document is not aimed at, nor intended for use by retail investors.

Copyright © 2013 Franklin Templeton Investments. All rights reserved.

This document is intended to be of general interest only and does not constitute legal or tax advice nor is it an offer for shares or invitation to apply for shares of the UK-domiciled OEIC, Franklin

Templeton Funds OEIC (“the Fund”). Nothing in this document should be construed as investment advice.

Subscriptions to shares of the Fund can only be made on the basis of the current prospectus, the relevant Key Investor Information Document, accompanied by the latest available audited annual

report and the latest semi-annual report if published thereafter, which can be found on our website or requested from the address below.

An investment in the Fund entails risks which are described in the Fund’s prospectus and the relevant Key Investor Information Document.

The value of shares in the Fund and income received from it can go down as well as up, and investors may not get back the full amount invested. Currency fluctuations may affect the value of

overseas investment. An investment in the Fund entails risks which are described in the Fund’s prospectus and in the relevant Key Investor Information Document. The Fund invests in a specific

sector or geographical area and the returns may be more volatile than a more diversified fund.

No shares of the Fund may be directly or indirectly offered or sold to nationals or residents of the United States of America. Shares of the Fund are not available for distribution in all jurisdictions and

prospective investors should confirm availability with their local Franklin Templeton Investments representative before making any plans to invest.

Opinions expressed are the author's at publication date and they are subject to change without prior notice. Performance details provided are in GBP, include the reinvested dividends net of basic rate

UK tax and are net of management fees. The Franklin UK Smaller Companies Fund launched on 17/10/11 to receive the assets of Rensburg UK Smaller Companies Trust, a unit trust. Fund

performance data is based on the mid price of the Rensburg UK Smaller Companies Trust from its launch on 01/07/1991 to 30/09/2011 and the net asset value of the Franklin UK Smaller Companies

Fund A(inc) shares thereafter. Sales charges and other commissions, other taxes and relevant costs to be paid by an investor are not included in the calculations. Past performance is no guarantee

of future performance.

© 2013 Morningstar, Inc. All rights reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; an (3) is not warranted to be accurate, complete or

timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

References to indices are made for comparative purposes only and are provided to represent the investment environment existing during the time periods shown. An index is unmanaged and one

cannot invest directly in an index. The performance of the index does not include the deduction of expenses and does not represent the performance of any Franklin Templeton Group fund.

For a free copy of the latest prospectus, and the relevant Key Investor Information Document , the annual report and semi-annual report, if published thereafter or for more information about any

Franklin Templeton Investments’ fund, please contact: Franklin Templeton Investments, Telephone: 0800 305 306, Email: [email protected] or write to us at the address below.

Issued by Franklin Templeton Investment Management Limited (FTIML) Registered office: The Adelphi, 1-11 John Adam Street, London WC2N 6HT. FTIML is authorised and regulated by the

Financial Conduct Authority.

27 IMPORTANT INFORMATION

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