Managed by Giles Hargreave since July 1998, the £824m Marlborough Special Situations fund has produced strong outperformance compared with its IMA UK Smaller Companies sector peer group, beating the sector across one, three, five and 10-year periods.
The fund’s aim is to achieve capital growth by investing in smaller companies, new issues and businesses that are going through a difficult period but have good recovery prospects.
Mr Hargreave notes the investment philosophy for the fund is based on the fact that smaller companies tend to outperform their larger counterparts over the long term.
He explains: “I work with a sizeable team with a great deal of specialist expertise and experience in investing in smaller companies. We are primarily stockpickers conducting a lot of our own research in what is generally an under-researched area.
“We like to meet company management teams face to face because the quality of company leadership is particularly important in small caps. Between us we meet around 25 companies a week and only in exceptional circumstances would we invest without having met the management.”
The portfolio itself is large, with approximately 215 stocks, although the manager notes initial positions are “usually less than 1 per cent of the portfolio and even the larger positions – those that have really earned their place in the portfolio – are rarely more than 2 per cent”. He says this process tends to mean the volatility of the fund is below the average for the sector.
In spite of this, the fund’s key investor information document puts the risk-reward indicator of the portfolio at five out of seven, while ongoing charges sit at 1.54 per cent.
The manager acknowledges that while the process is primarily bottom-up, the team consensus on the macroeconomic picture “does contribute to portfolio construction”.
Mr Hargreave points out: “The influence of macro factors on individual stocks varies hugely in the smaller companies arena and some innovators and niche players may be sheltered to a degree from wider economic conditions.”
The fund has delivered consistently strong performance, with its 10-year return of 296.55 per cent significantly outperforming the sector average of 179.75 per cent. The fund has also beaten the sector in seven of the past 10 calendar years, according to FE Analytics.
Recent purchases include Clarksons, a shipping services group that is well positioned to grow as the shipping cycle turns and Genus, an animal genetics company “whose confluence of headwinds last year seem to us to be short-term stumbles that will be overcome”.
On the sales side, the team recently top-sliced CSR, a semiconductor company that dominates the Bluetooth industry. The manager explains: “The company was up strongly following a takeover bid from US-listed Microchip Technology. CSR has since turned down the bid.”
Overall, Mr Hargreave attributes the fund’s strong performance to two key factors. “One is the growth potential of smaller companies over the long term and the other is that we have a large and experienced team able to research and meet a large number of companies, enabling us to identify the strongest opportunities.”
Of the holdings that have performed well, the manager cites Plus500, a CFD (contracts for difference) provider; James Fisher, a service provider to the marine and oil and gas industries; Restore, a UK storage company; and Renew, the specialist engineering services company.
However, the manager notes that not all holdings have made a positive contribution to performance. Several – such as Xaar, the inkjet printing technology group; John Menzies, the aviation and logistics company; and Providence Resources, the Irish oil and gas company – were a drag on the portfolio.
Looking ahead, he notes: “Notwithstanding the macroeconomic and political uncertainties, the majority of our holdings continue to produce acceptable trading updates and outlook statements and we believe the portfolio remains well positioned.”
EXPERT VIEW
Jon Beckett, UK research lead, Association of Professional Fund Investors
Giles Hargreave is known for an aggressive style, shooting from the hip and quickly reacting to market conditions and having a strong bias to small caps. From what I can see, Mr Hargreave also likes recovery companies and so may appear to have less quality bias in his portfolio on certain measures. I’ve never held the Marlborough fund, which has probably been a big mistake, but I struggle with building-block funds that can move dynamically. This probably does the manager a massive disservice, and I know he is extremely respected. He is the colourful poster boy for ‘alpha’, the one that other managers want to beat now that Anthony Bolton has retired as a UK equity manager.
