IFSL Marlborough UK Micro-Cap Growth: January 2022 fund update

• Guy Feld and Eustace Santa Barbara hunt in some of smallest parts of the UK stock market
• They follow the same investment philosophy and process established by their highly regarded predecessor, Giles Hargreave
• Performance over the past year has been supported by strong stock selection within financials
• This fund is not on the Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

IFSL Marlborough UK Micro-Cap Growth aims to deliver long-term growth by investing in some of the smallest companies in the UK, including those not listed on the London Stock Exchange. Companies of this size are often overlooked by other investors which can provide an opportunity for the managers to uncover hidden gems.

This fund could complement other investments focused on larger global or UK companies. Additionally, given its focus on companies capable of above average earnings growth - known as growth investing - it may work well alongside a ‘value’ fund, investing in out-of-favour companies with the potential to recover. Smaller companies are higher-risk, and we believe they should only form part of a well-diversified adventurous portfolio.

In July 2021 we made the decision to remove the IFSL Marlborough UK Micro-Cap Growth fund from the Wealth Shortlist. We continue to have high conviction in co-managers Eustace Santa Barbara and Guy Feld, but we believe the fund is fairly large for the type of smaller companies it invests in and don't want it to grow significantly in size from here.

Manager

Guy Feld has co-managed this fund since February 2012 and has decades’ worth of experience analysing small and medium-sized companies. He is also co-manager of the Marlborough Global Innovation fund, which predominantly invests in small and medium-sized technology companies from both the UK and US.

In January 2021, Eustace Santa Barbara was appointed co-manager alongside Feld. He has over 16 years’ experience in the industry and joined Marlborough in 2013 from Close Brothers.

Collectively, the duo also 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 believe they leave few stones unturned when it comes to finding small companies with big potential.

They benefit from the support of an experienced team, several of whom also manage other UK focused funds. New additions include James Workman who joined the team in July 2021 from Rathbones where he covered small and medium-sized companies.

Veteran smaller companies investor Giles Hargreave also continues to serve as a sounding board for the managers but is no longer involved in day-to-day management.

Process

Feld and Santa Barbara like companies that are easy to understand and have the potential to grow significantly over the long term. If successful, they will invest more in their favourite investments, or ‘run their winners’. Before any investment is made, they like to meet with company management and assess their quality.

The team also delves into a company’s financial strength. Healthy balance sheets are preferred, and they don’t like excessive levels of debt. They also consider companies that have a great product or service but appear to be ‘under-valued’ due to short-term issues. Maybe they've missed a profit target, or the management team made some unpopular decisions. Either way they must have the potential to turn things around.

With over 1,000 companies to pick from, the managers are spoilt for choice. However, they primarily focus on companies under £250m in size at the time of investment. Most of the fund’s holdings are listed on the AIM index, a junior market of the London Stock Exchange. Several of their investments have also graduated into the FTSE 250 index of medium-sized companies following strong growth. Sector wise, they find most opportunity within technology, industrials, and consumer discretionary.

To mitigate the risk involved with smaller companies, the managers run a diversified portfolio of around 200 companies. Historically the managers have invested in over 250 but over recent years they have gradually reduced this number. This means they can invest more in their favourite companies as their conviction grows.

The past year has seen a wave of new companies listing on public markets to fuel their next stage of growth, known as an initial public offering (IPO). The managers have invested in several new companies such as retailer Marks Electrical, specialist cookware company ProCook and online builders’ merchant CMO group. In contrast, they’ve reduced some of their larger holdings like digital marketing company S4 Capital and Impax Asset Management. C4X, the drug discovery firm, was completely sold and the proceeds were used to invest in other companies the managers believe have more potential.

This fund can invest in unquoted companies. The managers only invest in a small number and don’t intend to make any further investments in these. 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.

The firm integrates 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. That said, this is not an ‘exclusions-based’ fund as it can invest in any sector.

Cost

The fund has a standard annual ongoing charge of 0.81%, but we’ve secured a 0.09% saving for HL clients. That means a net ongoing charge of 0.72%. The fund discount is achieved through a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP. We think this is excellent value for access to one of the most talented teams in the UK Smaller Companies sector. The HL platform fee of up to 0.45% per year also applies.

Performance

Since Feld began managing the fund in February 2012, it’s delivered some impressive performance. Over this time, it’s returned 386.53%* vs 246.77% for the FTSE Small Cap (ex Investment Trust) index. It’s also outperformed the 260.79% return for peers in the IA UK Smaller Companies sector. Our analysis suggests this is down to the managers’ ability to invest in companies with strong futures ahead of them. Past performance is not a guide to the future. All investments will fall as well as rise in value, so you could get back less than you invest.

During periods of market stress, the fund’s historically held up better than both the benchmark and the IA sector average. Although, it’s important to remember that smaller companies are 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 24.69%, underperforming the benchmark return of 31.26%. Our analysis suggests this is a result of style though, not stock selection. That said, the fund outperformed the IA sector average of 22.90%.

Financial companies including Liontrust and Impax were among the top performers over the year. Both these asset managers have experienced strong growth in their assets under management (AUM). Software company Cerillion also helped returns following record interim results in 2021. Other notable performers included media company Future and financial solutions provider Alpha FX.

Past performance is not a guide to the future. *Lipper IM to 31/12/2021.

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

Marlborough UK Micro-Cap Growth Key investor information