Marlborough Multi Cap Income: February 2021 fund update

Kate Marshall | Thu 25 February 2021

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• Manager Siddarth Chand Lall invests differently from many other equity income investors
• The fund has exposure to small and medium-sized companies offering potential for growth but also more risk
• The wider team includes experienced smaller companies investors, which is a strength
• The fund is on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

This fund mainly invests in dividend-paying small and medium-sized companies, instead of the larger companies most UK equity income funds target. These companies can offer greater growth potential because they’re at an earlier stage of their development, although this can also make them higher risk. Because this fund invests differently, it could sit well alongside larger company focused UK equity income funds to add diversification, or add equity exposure to a broader income portfolio. The focus on smaller companies increases risk and the potential for volatility compared with funds focused on larger companies. Investors should consider a longer investment horizon.

Manager

Siddarth Chand Lall has managed the Marlborough Multi-Cap Income fund since launch in July 2011. He joined Hargreave Hale in 2007 who are the investment managers to the fund. Hargreave Hale was bought by Canaccord Genuity in 2017, however there has been no change to the approach post acquisition or since launch. Before joining he was an analyst specialising in UK and European smaller companies.

Chand Lall works closely with team members across the group, which has fostered a collegiate approach to idea generation, stock discussion and understanding the wider economic picture. In October 2020 industry veteran Giles Hargreave stepped down as head of investment but retains a consultancy role within the group. Longstanding colleague Richard Hallett replaced Hargreave, which ensures continuity of the investment approach.

There are additionally three named analysts on the Multi Cap Income fund, which we feel offers adequate resource for the task in hand.

Process

The fund aims to provide income and growth by investing in UK shares. It sits in the IA UK Equity Income sector, but invests differently thanks to its exposure to small and medium-sized companies. This approach hinges on the manager’s philosophy that smaller companies tend to outperform their larger counterparts over time – although this is not guaranteed, and smaller companies carry greater risk.

There is a high level of dividend concentration in the UK market, with around two thirds of dividends paid by just 15 of the largest companies. By widening the net to search in small and medium-sized companies (including those quoted on the Alternative Investment Market), the manager can potentially diversify the income stream for investors. He also invests in some larger companies.

Through conducting its own research, the investment team believes it can uncover small and medium-sized companies where the market has not recognised their true worth or growth potential. The manager looks for good quality companies, which are reasonably priced and either pay a steady dividend now, or will increase their pay-out over time.

Ideas for investments are generated from an investable universe of 700 income paying stocks. Following analysis of financial statements and meeting companies’ management, there is debate both within this team and across the wider group. Whilst the team comes up with ideas, Chand Lall is responsible for deciding how much to invest in each company. He prefers to hold a large number of stocks, which means each company usually makes up no more than 3% of the fund, although recently he has held on to strong performers, so some have nudged over 3%.

There are currently 115 stocks in the portfolio although it has peaked to nearer 150 at times. This is quite a lot of holdings, but it reduces the risk of any one company’s failure impacting upon the fund’s returns or the income received. The fund only has 12% commonality with the FTSE All Share index, meaning performance will be different at times.

Typically, the fund manager owns no more than 5% of a company. This should improve the ease of buying and selling shares (liquidity) and helps to mitigate some of the risks of investing in smaller companies. The manager has no plans to invest in any unquoted companies, although the fund has done so in the past. 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.

The COVID pandemic meant some companies in the fund suspended their dividends in 2020. But, as at February 2021, only 13 companies out of 115 haven’t restarted payments. Chand Lall has taken a patient approach to these, preferring to wait for potential share price recovery or reinstated dividends, rather than selling at lower prices.

There is a bias to financial companies in the fund. The team currently find good opportunities across the sector, in niche asset managers like Polar Capital. This also allows the fund to indirectly access the technology sector, where Polar Capital are well represented. The team also holds Intermediate Capital Group, which provides access to private debt and equity markets, something generally not possible within this type of fund. They also own insurer Admiral, which has benefitted from a strong premiums market and less claims due to COVID-related lockdowns.

Culture

Chand Lall and his colleagues work for Canaccord Genuity, which bought Hargreave Hale in 2017. Canaccord Genuity are a Canadian based financial services company. Canaccord provides them with plenty of resources while allowing the managers the freedom and autonomy to run their funds the way they see fit.

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.

The firm integrate environmental, social and governance (ESG) factors into their company analysis. They believe this helps to highlight businesses that use more sustainable practices and could thrive over the long term. It could also uncover risks that are less obvious through more traditional company analysis.

Cost

The fund has an annual ongoing charge of 0.78%, but through Hargreaves Lansdown you can secure an ongoing saving of 0.19%. This means you’ll pay a net ongoing charge of 0.59%. The fund discount is achieved through a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP. An additional platform charge of up to 0.45% per year applies.

Part or all of the annual charge is taken from capital rather than income generated, increasing the potential for your investment’s capital value to be eroded.

Performance

Chand Lall's managed the fund since it launched in July 2011. In that time, he's delivered attractive returns, outperforming the FTSE All Share benchmark and IA UK Equity Income peers – although past performance is not a guide to the future.

As with any fund investing in smaller companies, returns have been more volatile, especially compared with those focused on larger, more stable businesses.

Over the longer term the focus on higher-quality companies means the fund has tended to hold up better than the market when it’s fallen. This won’t necessarily happen all the time though, as we saw over the first half of 2020. It hasn't tended to keep up quite as quickly when the market has risen, but this profile has led to good long-term returns.

The fund had a tough start to 2020 as the coronavirus pandemic severely impacted many companies’ ability or willingness to pay dividends. In the first half of 2020 the fund fell by 22.2%* compared to -17.5% for the FTSE All Share and -20.3% for the IA UK Equity Income peer group. Companies whose prospects were linked to the health of the economy (cyclical sectors) were in the eye of the storm and fared the worst, such as travel & leisure, banks and oil. The fund is also biased to medium-sized and financial companies, which were weak over this period.

The second half of 2020 saw markets recover. Positive signs of a COVID vaccine, a Biden victory in the US presidential election and the perceived resolution of Brexit helped to improve investor sentiment. Some of the more cyclical sectors such as mining, travel & leisure and general retailers performed strongly whilst healthcare, utilities and oil & gas underperformed. In this period the fund returned 12.5% vs the FTSE All Share return of 9.3% and the IA UK Equity Income peer group return of 11.9%.

Over the last 12 months to the end of January 2021, the fund returned -12.9% vs the FTSE All Share returning -7.6% and the IA UK Equity Income peer group -9.1%. Investments in smaller companies and the consumer discretionary and industrials sectors held back returns. Cineworld and Go Ahead were especially affected by lockdowns, though Intermediate Capital Group and Games Workshop helped returns.

Past performance is not a guide to the future. Source: *Lipper IM to 31/01/2021.

More on Marlborough Multi-Cap Income, including charges

Marlborough Multi-Cap Income Key Investor Information