The £119m Marlborough UK Multi-Cap Growth fund was launched in 1995 with the aim of achieving medium- to long-term capital growth by investing in small-, medium- and large-cap UK companies. A member of the 2016 Investment Adviser 100 Club, the vehicle was originally named the Marlborough UK Leading Companies fund, but was rebranded in January 2014 “to reflect the multi-cap approach that is a long-term feature of the fund”, explains manager Richard Hallett.
One of the objectives of the fund is to consistently outperform the IA UK All Companies sector and the FTSE All-Share index, with Mr Hallett adding: “Essentially we seek out companies from across the market cap spectrums that have a sustainable competitive advantage, and an ability to leverage that competitive edge to raise prices and/or take market share.”
The focus is on growth businesses, with the manager highlighting firms’ competitive edge could be in the quality of their management, branding, sales and marketing, product innovation, research and development, or intellectual property. “In reality, it will likely be a combination of some of these factors,” he says. “We like businesses that grow throughout the market cycle, with limited need for capital expenditure and high levels of free cashflow to invest in further growth.”
The portfolio holds between 45 and 65 stocks, which are diversified in terms of industry sector and market cap. Individual positions tend to be between 1 per cent and 4 per cent of the portfolio.
In addition, the team “avoids higher-risk companies with low-quality earnings that are vulnerable when sector conditions change and those with low visibility of earnings”.
“So we tend to steer clear of commodities, construction and biotech. We also avoid businesses with low barriers to entry, such as contractors, consultancies and recruitment companies,” he says.
Mr Hallett, who has managed the fund since 2005, notes the stock selection process has remained consistent under his tenure, favouring companies that are benefiting from structural change and/or established long-term secular trends.
“We’re primarily stockpickers and take the view that calling markets is largely guesswork, so we have a natural tendency to remain macro-agnostic,” he adds. “As a consequence, we avoid cyclical businesses. We prefer quality secular growth businesses, which are less affected by the wider economic picture, or those in charge of their own destiny because they are executing a turnaround strategy or taking over a competitor.”
The fund’s P income share class sits at a risk-reward level of six out of seven, while ongoing charges are 0.85 per cent according to its key investor information document.
For the five years to October 18 2016 the fund has delivered a return of 105 per cent compared with the IA UK All Companies sector average of 69.5 per cent, data from FE Analytics shows.
It has also outperformed the sector across one- and three-year periods, while the 10-year return of 160 per cent is more than double the sector average of 71.6 per cent.
Mr Hallett explains: “So far this year, being underweight in property and financials has benefited performance. More generally, as global growth has slowed, demand for defensive or secular growth has increased at the expense of cyclical sectors, which have previously benefited from the huge tailwind of lower rates over the last five or six years. Since the Brexit vote, sterling [has fallen against] the dollar and euro; consequently, companies with global revenues have benefited.”
Recent changes to the portfolio include a reduction in domestic-facing businesses such as Greggs and WHSmith, while the team has sold L&G “due to the negative effects of lower interest rates”. Instead they have added to “niche global technology businesses such as Accesso, Craneware and GB Group. We also upped our positions in global defensive names like British American Tobacco, Experian and Merlin Entertainments”.
But he acknowledges that the fund’s underweight positioning in mining, oil and big pharmaceutical companies – all of which have generally risen – “has acted as a drag on performance”.
Looking ahead, he remains optimistic noting the expectation is for monetary conditions to remain supportive. “With this backdrop, and given the global hunt for yield, quality companies with robust earnings and dividend growth prospects will, we believe, remain in demand.”
