Best in Class: Marlborough European Multi-Cap

Europe has been overlooked and unloved in the past decade, as economic and political uncertainty have blighted the market.

However, the start of 2020 appeared to offer some optimism for the region as monetary stimulus, low unemployment and some strides forward with Brexit negotiations appeared to cultivate a more hopeful outlook for growth.

A few months later and the spread of the coronavirus across Europe – and the rest of the world – has made recession an inevitability.

Preliminary data from the first quarter of 2020 showed economic growth contracted by 3.8 per cent quarter-on-quarter in the eurozone – and we can expect more pain to come.

As the number of cases and deaths across the mainland have started to fall, Europe has begun to ease lockdown measures and the question has turned to how quickly it can recover.

The Marlborough European Multi-Cap fund offers access to much smaller companies than many of its peers

There are a couple of factors which support the case for Europe, notably that the economy has become more resilient since the global financial crisis, household debt had been falling, economic growth had been steadier (if still only moderate) and the banks are better capitalised on this occasion.

Another factor to consider is that there are a number of global companies residing in Europe and that their growth is not exclusively tied to the likes of German growth or French politics for example. In fact, European equities derive a good portion of their revenues and profits from outside the Continent.

In such a large region, active management, flexibility and diversification are crucial to success – and this week’s Best in Class has all three in spades.

The Marlborough European Multi-Cap fund offers access to much smaller companies than many of its peers, with the premise being these businesses are often overlooked and hence have the potential to outperform.

The fund has been managed by David Walton since 2013. Mr Walton is part of the Hargreave Hale team, who the fund is outsourced to and which is widely considered one of the leaders of smaller companies’ research in the UK.

Around 40 per cent of the fund is typically invested in micro-cap companies with a market cap of up to £250m.

This is much more than even most specialist European small-cap funds. However, the fund is genuinely multi-cap and it will invest all the way up into mega-caps.

Investment decisions are primarily bottom-up, however there is a macroeconomic consensus within the team. Ideas are generated both from within the team and from a network of brokers.

Mr Walton looks for undervalued stocks with above-average growth potential and strong management teams. He meets with a lot of companies and looks closely at how management is incentivised.

Once an idea is identified, one member of the team will analyse the company.

Cashflow and growth potential of a company are scrutinised, while quantitative analysis will focus on studying the financial statements. The team will then look to meet senior management – if a meeting has not already taken place.

Any final decisions and stock weightings rest with Mr Walton.

The fund is well-diversified with around 90 different holdings. Positions are kept fairly small to minimise stock-specific risk and to maximise the liquidity of the fund.

The fund has no sector limits, but the manager is conscious of sector exposure.

The fund’s largest holdings at present include Italian IT firm SeSa Spa (3.7 per cent), global healthcare behemoth Roche (3.1 per cent) and Finnish’s heater, sauna and spa manufacturer Harvia (3.1 per cent).

Fund performance has been excellent during mr Walton's tenure, returning 110.3 per cent, compared with 52.5 per cent for the Investment Association Europe ex-UK sector. The fund has an ongoing charges figure of 0.83 per cent.

You get a bit of everything with this fund, but the fact that it is backed by a stellar small-cap team, and a manager who has been very successful at mitigating the risks that are typically associated with smaller companies, builds a compelling argument for including this fund in a portfolio.

Darius McDermott is managing director of FundCalibre