In the UK smaller companies sector there are few fund managers more experienced and successful as Giles Hargreave. He and his talented team are experts in finding opportunities among the smallest businesses listed on the UK stock market. And when we say small we mean it. Around two-thirds of the companies in Marlborough Special Situations, for example, are less than a quarter of the size of the smallest FTSE 100 company. The average company size in Marlborough UK Micro-Cap Growth is even smaller and smaller still in Marlborough Nano-Cap Growth.
Companies that size don’t register on most fund managers’ radars. This gives Hargreave and his team opportunities to spot overlooked companies they think have excellent long-term growth prospects. They’ve certainly made the most of those opportunities. Since Hargreave took over Marlborough Special Situations in 1998 he’s grown it by a phenomenal 3,104.8%*, compared with the FTSE Small Cap (excluding investment trusts) index’s 211.6% return. Returns like this are exceptional and so should not be seen as an indication of future performance, and you could get back less than you invest as can be seen by the last 12 month’s performance (see below).
Investing in such small companies comes with considerable risk. Their performance is more volatile than larger companies and they’re more likely to go bust. That’s why we think investing in smaller companies should only be done by adventurous investors with a long-term approach.
Marlborough Special Situations performance under Giles Hargreave
Past performance is not a guide to the future. Source: Lipper IM* to 30/09/2019
|Annual percentage growth|
| Sep 14 -
| Sep 15 -
| Sep 16 -
| Sep 17 -
| Sep 18 -
|Marlborough Special Situations||16.9%||11.6%||25.0%||13.2%||-10.1%|
|FTSE Small Cap ex Investment Trusts||9.0%||10.5%||17.8%||0.7%||-7.8%|
Past performance is not a guide to the future. Source: Lipper IM to 30/09/2019
Marlborough team’s approach to illiquid investments
Shares in UK smaller companies are more difficult to buy and sell (less liquid) than larger companies’ shares. Hargreave and co also invest in a small number of unquoted companies. Unquoted companies are those that don’t trade on any stock market, so it’s particularly difficult to buy and sell positions in them. Their less-liquid nature makes them higher risk.
That’s why Hargreave limits unquoted companies in his funds. Whenever a new unquoted investment is made, he makes sure no more than 3% of the fund is invested in unquoted companies in total. If they grow in value, they may make up a larger part of the portfolio.
Marlborough Special Situations currently has a small number of unquoted companies in its portfolio, making up 1.8% of the fund. Two of the holdings are expected to IPO within the next year, meaning they will go from being private, difficult to trade companies to publically listed shares.
Hargreave and his team also invest in higher-risk unquoted companies in two other funds – Marlborough Nano Cap Growth, which has 5.2% allocated to unquoted companies and Marlborough UK Micro-Cap Growth which has 2.2% invested in unquoted companies.
The team thinks there are a small number of highly attractive private companies where the opportunity justifies the less-liquid nature of the investment. For now though Hargreave has no plans to add any more unquoted companies to the funds. We would expect the funds’ exposure to unquoted companies to come down over time.
Marlborough Special Situations update
In the last 12 months Hargreave’s reduced the total number of companies in the Marlborough Special Situations fund from around 190 to 168. That still provides lots of diversification.
Hargreave recently invested in gold companies from Canada, Australia and Africa, and he may invest in more. The team thinks gold could perform well in the current environment of high global debt, the emergence of negative bond yields and slowing global growth.
They’ve also seen a slowdown in mergers and acquisitions (M&A). Small companies are often targets for larger companies, who buy them to tap into their market niche or innovative products and services. The team thinks current M&A activity hasn’t been as low since the financial crisis.
They believe part of that is down to Brexit uncertainty. Smaller UK companies are generally more exposed to the UK economy than larger ones. They think Brexit has made many investors particularly nervous about UK smaller companies.
That’s part of the reason why Marlborough Special Situations has struggled recently. Over the past 12 months it’s fallen 10.1%*, compared with FTSE Small Cap (excluding investment trusts) index’s 7.8% drop. Recent weak performances from healthcare companies have also held back returns.
Disappointing short-term performance isn’t uncommon among smaller companies though. In our view Hargreave and his team are still among the best investors in the sector. We think their experience and skill puts them in a strong position to keep delivering excellent long-term results for investors, although of course there are no guarantees. Marlborough Special Situations isn’t on the Wealth 50 list of our favourite funds as we prefer Marlborough UK Micro-Cap Growth and Marlborough Nano-Cap Growth, which are also run by Hargreave and his team and do feature on the Wealth 50.