EquitiesJul 14 2014

Falling mid caps hit Marriage’s fund

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Exposure to troubled medium-sized companies has been cited as a key cause of a recent short-term performance lull by Schroders’ Paul Marriage.

The manager of the group’s £1bn UK Dynamic Smaller Companies fund has produced a top-quartile return of 233.6 per cent since he took on the fund in January 2006, but in 2014 the manager has delivered a third-quartile loss of nearly 3.5 per cent, according to FE Analytics.

Mr Marriage said mid and small caps had “fallen aggressively out of favour”, adding that a “painful area” had been small-cap stocks that had grown to become mid caps.

He cited top holding Xaar as being a stellar stock in 2013, but one that had suffered in terms of its share price this year. Last year, the stock rose more than 300 per cent but it has since fallen 54.1 per cent year to date.

WANdisco also rose 180 per cent last year, but has fallen 53.6 per cent in 2014.

Mr Marriage said these stocks were among those that had started 2013 as small caps, but because of their strong performance they had ended up at the bottom of the mid-cap spectrum.

“Therefore they have become the biggest chunks of the portfolio and deemed to be more tradeable,” he said. “Mid caps have had more pain.”

He added: “Our stockpicking has not been as good this year as it was last year or the year before.

“We have taken a lot of pain at the top of the portfolio where there are bigger positions. Further down we have had some really good success stories but when something like Xaar comes off 50-60 per cent, that will be 100-200 basis points [off] the portfolio.”

Clinigen Group, another top 10 holding, has suffered a similar fate after rising more than 180 per cent in 2013 but dropping nearly 36 per cent this year.

The manager also said he was willing to stick with companies that were currently out of favour because of what he saw as long-term potential.

He cited Premier Foods as one such stock.

“It is a long-term play but the market is worried about the supermarket price war, which is a reasonable concern,” he said. “But it is a very deep value play with a much-improved balance sheet and it will be a good stock in a risk-on phase.”

The manager said he had experienced periods before where it had been “difficult”.

“In my experience you can always do better,” he said. “There is no such thing as having cracked it. The best thing is to stick to what you are good at.”

Mr Marriage also said he had been active in the initial public offering (IPO) market, where companies list their shares on the stock exchange for the first time.

He said he had been involved in eight IPOs and it would be these that “drive performance in 2015, 2016 and beyond”.

The manager stated that even though he had been active in the IPO market, he had only met with 30 companies and declined to meet another 20 that planned to come to market.

Has the stratospheric rise in assets of Marriage’s fund changed his style?

About the time talk of a takeover by Schroders of Cazenove emerged in March last year, Paul Marriage’s fund was £437m in size and at the end of January this year it had rocketed to more than £1.3bn.

It has since, largely due to market falls, shrunk back to £942m last week, according to data from FE Analytics.

While there are funds as large as Marriage’s in the sector, most are much smaller. Fidelity, for instance, took the decision to remove its UK Smaller Companies fund from platforms at £250m in a bid to halt flows. Meanwhile, Schroders has hard closed Mr Marriage’s fund, which means investors can no longer access the product.

Some have speculated that running such a large product creates style drift. Mr Marriage claims not. He says he still abides by his “one in, one out policy”, meaning he will not add a new company unless it is better than a stock already in his portfolio. He also sticks to adopting a minimum holding of 1 per cent.

The fund, however, does hold more stocks than it used to. At £100m, Mr Marriage said he held roughly 50 stocks, but May’s factsheet states it now has holdings in 85 companies.

However, the manager assures investors that when he joined Cazenove from Insight Investment he had built something that could be run with “£50m or £1bn”.

“The process won’t change,” he said. Mr Marriage added that in spite of the size of the fund, he would continue focusing on small caps and not, like “lots of small cap funds become a mid-cap fund in disguise”.