Marlborough Special Situations - no reward without risk

Jonathon Curtis | Fri 14 December 2018

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• Recent global market turbulence has hurt the fund’s performance
• The managers have found new opportunities from the market drop
• Long-term performance is excellent

Our view

The UK is full of innovative and enterprising small businesses with great growth potential. Yet they’re often overlooked when it comes to investing. With hundreds of companies available, how do you find out which ones could become the stars of the future?

That’s where Giles Hargreave and Eustace Santa-Barbara come in.

They meet hundreds of company management teams every year. They aim to sort the wheat from the chaff and find companies with the best growth prospects. They leave few stones unturned, so they can get a really good understanding of a business. And most importantly, try to figure out where it’s headed.

We think the managers are skilled at choosing companies to invest in. They won’t get it right every time though and past performance isn’t a guide to future returns. The fund’s currently on the Wealth 150 list of our favourite funds.

How do the managers invest?

The managers invest in lots of different companies. There are nearly 200 in the fund at the moment, so there’s plenty of diversification within the sector. Investing in smaller companies is higher risk than investing in larger ones though. They’re more likely to go bust than their larger counterparts. The managers are prepared to invest in any industry, depending on where they find the best opportunities. Sometimes they’ll invest in a company as it joins the stock market. This is known as an initial public offering, or IPO.

The managers stay invested as companies grow. But they’ll often sell if they think a company’s become too big or performed well, which might limit future growth potential. NMC Health, a Middle Eastern healthcare provider, grew so large it joined the FTSE 100. So the managers sold some of the shares. They also sold shares in Blue Prism, a robotics company, after its share price grew rapidly.

How’s the fund performed?

The fund’s performance has been excellent over the long term. In the last 10 years it’s grown 496.8%* against 300.8% for the FTSE Small Cap (excluding investment trusts). Santa Barbara became as co-manager in 2014. There’s no guarantee the fund will continue to perform well though as past performance isn’t a guide to the future.

Smaller companies are volatile and we’ve seen that recently. The fund fell sharply in October, as did the broader market of smaller companies. These are short-term movements, but it highlights the need for a long-term approach when investing in UK smaller companies.

Marlborough Special Situations 10-year performance

Past performance is not a guide to the future. Source: Lipper IM* to 30/11/2018

Past performance is not a guide to the future. Source: Lipper IM to 30/11/2018

Managers’ outlook

The managers have taken advantage of the recent stock market turbulence. They’ve been looking for opportunities they think now offer better value, and added to existing investments at lower share prices.

While there’s some uncertainty surrounding the UK at the moment, the average company in the fund makes more money overseas than in the UK. So it’s not only reliant on the health of the UK economy.

Generally though Hargreave and Santa-Barbara are optimistic on the outlook for UK small companies. They think there are lots of exciting opportunities out there waiting to be found.

Find out more about the fund including charges

Marlborough Special Situations Key Investor Information