Marlborough Special Situations: March 2021 Fund Update

Dominic Rowles | Thu 11 March 2021

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• Guy Feld and Eustace Santa Barbara are a talented fund management duo, whom we hold in high regard
• They are supported by a strong team, including Giles Hargreave – one of the most successful UK small cap investors
• A very diversified portfolio providing exposure to smaller parts of the UK market
• The fund does not currently feature on the Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The Marlborough Special Situations Fund invests in small UK companies, including those not listed on the London Stock Exchange. Investing in emerging industries and disruptive sectors, it 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.

The fund could work well alongside other funds focused on international and larger UK companies. However, smaller companies are higher-risk and require a long-term investment horizon of at least 5-10 years.

We currently prefer other funds run by this management duo, which focus on even smaller companies with greater growth potential.

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.

Eustace Santa Barbara has been co-manager on the fund since September 2014 and has over 16 years’ experience in the investment industry. Much of his time had been spent working alongside Hargreave so we’re comfortable he has a good knowledge of the investment process and the companies the fund invests in.

Guy Feld has recently been appointed co-manager and has over 25 years’ experience analysing small and medium-sized companies. He is also co-manager of the Marlborough Technology fund and we think he can comfortably handle these responsibilities.

Collectively the duo also manage Marlborough Nano-Cap Growth and Marlborough UK Micro-Cap Growth which focus on smaller UK companies than this fund. Both managers have built an impressive track record and we rate them highly. Supported by one of the strongest and best-resourced smaller companies’ teams, we believe the managers 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 they believe have the potential to grow significantly over time. If successful, they will invest more in their favourite holdings and ‘run their winners’ (hold on to them for longer). Healthy balance sheets are preferred, and they don’t like excessive levels of debt, although they acknowledge it may be prudent for companies to borrow money and take advantage of ultra-low interest rates.

The team look beyond short-term noise and focus on the long-term. 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.

UK smaller companies come in all shapes and sizes and with around 2,000 companies to pick from, the team are spoilt for choice. Over half of their investments are listed on the AIM index, a junior market of the London Stock Exchange, whilst several have graduated into the FTSE 250 – the index of medium-sized UK companies. They invest across a broad range of industries, but the fund is currently focused towards the consumer discretionary and industrial sectors.

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 diversified portfolio of between 120-160 companies. They currently hold just over 130 which is far more than peers in the sector.

The managers keep a close eye on companies being listed on the stock market for the first time through an IPO (initial public offering). IPOs can be a great source of new investment ideas for the team. They recently took part in the IPOs of textiles company HeiQ and IT services provider, Bytes, a company who they believe benefits from an experienced management team and the prospect of organic growth. They also topped up existing holdings such as Hilton Foods, a food packaging business that they believe is attractively valued. They also took profits from several investments including genetics company Genus and specialist retailer Pets at Home.

This fund can invest in unquoted companies. They 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 managers’ 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%. The HL platform fee of up to 0.45% per year also applies.

Performance

The fund has an excellent long-term track record. Over the past 10 years, it’s risen 258.3%, compared with 195.9% for its peers in the IA UK Smaller Companies sector. Whilst Hargreave has been responsible for a large part of this, the current managers use a similar process and is one we have conviction in. 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.

This fund has historically held up better than the IA UK Smaller Companies sector average during falling markets, a result of its well-diversified portfolio. That said, during periods of market stress, smaller companies tend to be more volatile than large ones. 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.

Over the past year the fund returned 34.2%, compared to 23.9%* for the sector average. Performance was driven by the managers’ ability to select companies with outstanding prospects, and being exposed to the right sectors. Some of the fund’s strongest performers included digital advertising agency S4 Capital and venture capital firm Draper Espirit, whose investment in UiPath recently completed a successful round of fundraising. Other notable performers include logistics company DX and video game developer Frontier Developments. Petrol station operator Applegreen and software companies IMImobile and Idox also performed well after receiving takeover offers.

Past performance isn’t a guide to the future. *Source: Lipper IM to 28/02/2021.

Find out more about Marlborough Special Situations, including charges

Marlborough Special Situations Key investor information