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30th March 2015

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Paul Spencer, manager of the Elite Rated Franklin Mid Cap fund.

With the FTSE 250 having recovered the ground it lost in 2014, Paul Spencer, manager of the Franklin UK Mid Cap fund, talks about the current themes in his portfolio.

“It has been a very interesting time over the past six months. We’ve had an oil price collapse, sterling strengthening against the euro and weakening against the dollar, ongoing discussions about a Greek exit from the Eurozone and more quantitative easing from both the European Central Bank and the Bank of Japan.

“In the meantime, the UK has continued with, what seems to be, quite a sustained recovery. The FTSE 250 (market index for medium-sized companies) has recovered all of the ground it lost in the first half of 2014, due to severe weakness across the consumer sectors.

“In terms of themes for my area of the market, I think there are probably three areas I would highlight at the moment.

“The first is Merger and Acquisitions (M&A). We've had six bids recently, and I think M&A will be a theme that is likely to run through the next 12 months. Bearing in mind that corporate balance sheets are very, very robust at the moment, there's an awful lot of fire power within corporations to do deals. I also think that there will be renewed interest from US and European private equity groups.

“Secondly, we're trying to take advantage of the fact that consumers are going to get thicker wallets as a result of what's happened to oil, food and wages. Energy costs (in the form of petrol/diesel) have been falling quite markedly since the middle of 2014, and water and power bills are also down by about 5%. Food deflation is also helping shopping bills. On the other hand, we have finally seen some real wage growth for the first time in a number of years.

“Thirdly, we are also trying to pick up the dollar earning theme in the portfolio. The FTSE 250 has only 11% of profits coming from the US, so at first glance, you might say it's not necessarily a natural place to go for this theme, but there are some very dollar heavy sectors.

“That brings us to a broader outlook in terms of valuations. I have been saying for a little time now that the market generally has been looking fairly valued in absolute terms and that hasn't really changed in the past six months. From a relative perspective, I would make the point that if you strip out the big 20 mega-caps in the FTSE 100, which I think is right to do, and compare the FTSE 250 against the 80 companies remaining, the FTSE 250 is at about a 5% discount still. If we are right in our stock and sector positioning, there is still money to be made.”

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Paul's views are his own and do not constitute financial advice.