Marlborough UK Micro-Cap Growth: January 2021 fund update

Dominic Rowles | Wed 27 January 2021

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• Guy Feld and Eustace Santa Barbara are a talented fund management duo, whom we hold in high regard
• We believe the managers are supported by one of the strongest teams in the UK Smaller Companies sector, including Giles Hargreave – one of the most successful UK small cap investors
• Suited to an adventurous portfolio looking to deliver long-term capital growth

This fund is on the Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The managers of the Marlborough UK Micro-Cap Growth fund hunt in the smallest parts of the UK stock market, including companies not listed on the London Stock Exchange. Investing in emerging industries and disruptive sectors, the fund offers diverse exposure to the companies of tomorrow. These companies are often overlooked by other investors, which provides an opportunity for the managers to uncover hidden gems.

We think the fund could work well alongside other funds focused on the larger FTSE 100 and FTSE 250 companies. However smaller companies are higher-risk, and should only form a small part of a well-diversified portfolio.

Manager

After several decades in the investment industry, Giles Hargreave recently stepped back from day-to-day management of this fund. Whilst no longer at the helm, Hargreave is still involved with the fund, taking up sector analysis responsibilities and offering guidance and knowledge to the next generation of managers.

Guy Feld has been a co-manager on the fund for over eight years, and has over 25 years’ experience analysing small and mid-cap companies. He is also co-manager of the Marlborough Technology fund and we think he can comfortably handle these responsibilities.

Eustace Santa Barbara was recently appointed co-manager on the fund after working alongside Hargreave since 2013 on the Marlborough Special Situations fund – a strategy also investing in smaller companies. Santa Barbara has over 16 years’ experience in the investment industry.

Collectively they manage Marlborough Nano-Cap Growth and Marlborough Special Situations which also focus on UK smaller companies. Both managers have built up an impressive track record and we rate them highly. Supported by one of the strongest and well-resourced smaller companies’ teams, we believe Marlborough leave few stones unturned when it comes to finding small companies with big potential.

Process

Feld and Santa Barbara like companies that are easy to understand and have the potential to grow significantly over time. If successful, they will continue to top-up investments intheir favourite holdings and ‘run their winners’. Healthy balance sheets are preferred, and they don’t like excessive levels of debt, although they acknowledge it may be prudent for companies to take advantage of the current ultra-low interest rate environment.

The team look beyond short-term noise and construct a long-term view. This is where we think they can add value. Before any investment is made, they like to meet with company management and assess their quality. Objectives set by the companies’ board are recorded and closely monitored in subsequent meetings - they like to follow up at least twice a year.

With more than 1,000 companies to pick from, the team have a broad investment universe. For a stock to be considered for the portfolio it must have a market cap of £250m or below at the time of purchase. Many of their holdings are listed on the AIM index whilst several have graduated into the FTSE 250 – the index of medium-sized UK companies.

Smaller companies are higher risk. While some may end up several times larger, some could do badly or even go bust. To mitigate the risk of one company significantly impacting performance, the managers run a very diversified portfolio with over 170 companies – far more than their peers in the sector. Historically this figure has been over 200. The managers have recently increased the maximum holding size from 2.5% to 4%. They think this enables them to express greater conviction in their best ideas.

The team has taken advantage of share price weakness throughout the year and selectively topped up holdings at lower prices. They continue to find the most opportunity in the consumer discretionary and technology sectors. A shift in the way consumers interact with businesses has supported ecommerce holdings such as Joules, who generate a large proportion of their sales online. Equally the team see value in more unloved parts of the market such as pub chains and restaurants. They also like Jet2, the package holiday company. Whilst sensitive to travel restrictions, the company’s strong balance sheet could see it come out stronger on the other side.

This fund can invest in unquoted companies. The managers currently only invest in a small number and don’t intend to make any further investments in companies not listed on the stock market. We assess the liquidity of this fund and receive regular liquidity data from the fund group. We are comfortable that the diverse investor base and large number of holdings means the fund has adequate liquidity for retail investors. However, investors should be aware that investment in unquoted companies is higher risk and they can be considerably less liquid than those traded on established stock exchanges.

Culture

The culture within the team is one of its strengths. It’s a close-knit one, with everyone fully behind the same investment philosophy. They are employed by Hargreave Hale, an asset manager which was bought by Canaccord Genuity, a Canada-based financial services company, in 2017. Canaccord provides them with plenty of resources while allowing the managers the freedom to run their funds the way they see fit. The way Canaccord rewards them ensures they’re focused on the long term, which is a good thing for investors.

Marlborough Fund Managers, from where the fund gets its name, is a separate company. It provides the fund’s marketing and distribution and doesn’t get involved in the investment side of things. It’s an uncommon set up, but one that’s been in place for many years, and seems to work well and suit everyone involved.

Cost

The fund has a standard annual ongoing charge of 0.78%, but we’ve secured a 0.09% saving for HL clients. That means a net ongoing charge of 0.69%. We think this is excellent value for access to one of the most talented managers and teams in the UK Smaller Companies sector. The HL platform fee of up to 0.45% per year also applies.

Performance

Long-term performance has been exceptional. Since launch in October 2004, the fund’s risen 953.8%*, compared with the FTSE Small Cap (excluding investment trusts) index’s 204.5%* gain. Our analysis puts this down to the managers' ability to select exceptional companies that have gone on to perform well. Remember past performance doesn’t predict future returns though. All investments will fall as well as rise in value, so you could get back less than you invest.

UK Smaller Companies have particularly suffered amid global stock market volatility. They’re seen as more sensitive to the state of the economy than larger multinational companies. Smaller companies are also less liquid (their shares are harder to trade), which can heighten falls if many investors try to sell at the same time. That said, during periods of market stress, the fund has historically held up better than the IA UK Smaller Companies sector average.

Since the lows in March 2020, the sector has rebounded strongly and much of the lost ground has been made up. Over the past 12 months the fund’s grown 22.7%*, compared with the FTSE Small Cap (excluding investment trusts) index’s 1.7%* gain. Digital marketing business S4 Capital was a standout performer. Other notable performers include Ceres Power and Games Workshop. Long-term holding IMImobile also saw a surge in its share price after the cloud communications software company received a takeover bid from Cisco.

Past performance is not a guide to the future. *Lipper IM to 31/12/2020.

Find out more about Marlborough UK Micro-Cap Growth including charges

Marlborough UK Micro-Cap Growth Key investor information