Cazenove’s UK small-cap equity star Paul Marriage has ventured out of his company-size comfort zone to buy into the flotation of insurer esure, in the belief it can take market share from bigger players.
Mr Marriage tends to invest in smaller niche companies such as Xaar, a leading producer of print-heads that he bought back “when no-one else wanted anything to do with it”.
But the top-performing manager invested heavily in non-life insurance company esure when it floated at the end of March 2013 with a market capitalisation of £1.2bn because of his conviction about the firm’s growth prospects.
He has since raised his initial 1.25 per cent weighting in the firm to 2 per cent and has already been rewarded. The share price has risen by 2.6 per cent since its share offering, in spite of losing value in the first couple of weeks as a public company.
Mr Marriage said he had bought into the share offer because “esure is the best run direct non-life insurance company in the UK”.
He said: “It has a fairly low risk-profile that we liked, it is conservatively managed with a sensible valuation, a good balance sheet and good cashflow.
“Yet the firm still has interesting growth prospects and there is a good chance for them to take market share from the likes of Admiral and Direct Line.”
The UK Smaller Companies fund is the best performing in the IMA UK Smaller Companies sector over the past three years, delivering a return of 114.9 per cent – more than double the sector average return of 55.4 per cent, according to FE Analytics.
In that time the fund has grown from £32m at the end of April 2010 to £502.9m as of May 15, according to Cazenove.
The manager said there was no set capacity limit for the fund but said “if we feel we cannot perform to the standard we expect then we might close, but I do not feel that we have reached that point”.
At the same time as buying into esure, Mr Marriage also invested in a smaller firm called HellermannTyton on its share issuance at the end of March this year.
HellermannTyton, which makes cable ties for industrial use, is an example of the niche companies that Mr Marriage favours in the fund.
“The firm is the market leader in the world for cable ties,” he said. “They manufacture the industrial versions of these things for sectors like automotives and aerospace, and there is growing demand for cabling these days – all those wires need to be kept in place by cable ties.
“We like these companies that are global leaders in their niche markets, with a product that is fundamentally changing the market in which it is in. They probably make up roughly 70 per cent of the portfolio.”
Mr Marriage said he had also been putting some of the significant inflows into the fund into the likes of CML Microsystems and Judges Scientific.
Unhappy Marriage: some wrong calls
Even though Cazenove UK Smaller Companies is one of the best-performing funds in the IMA universe in both three and five years, like every manager, Mr Marriage sometimes gets it wrong.
An example of a stock call the manager got wrong was Renold, which is a manufacturer of chains, gears and couplings. Mr Marriage said he had bought into the firm because it had good long-term potential in its niche market, but that growth story has yet to play out.
The firm’s share price has dropped 30 per cent in the past year and is nearly 75 per cent lower than its peak before the crisis. The stock had dropped to a position of less than 1 per cent in the Cazenove fund and Mr Marriage said he had taken that as a signal to sell out of the stock.
Another stock that has dragged on performance is Snoozebox, the portable hotel chain fronted by former Formula One driver David Coulthard. The share price plummeted at the end of April after a profit warning led its chief executive to resign. However, the stock was only a 0.25 per cent position in the fund at the time as Mr Marriage was already in the process of selling out.
