Marlborough Multi Cap Income: March 2022 fund update

• 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 and diversification in income 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 which is the investment manager to the fund. Hargreave Hale was bought by Canaccord Genuity in 2017, however there has been no change to the investment 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 than some peers as a result of its exposure to small and medium-sized companies. This approach follows from 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.

Through conducting its own research, the investment team believes it can uncover small and medium-sized companies where the market hasn’t recognised their true worth or growth potential. The fund invests in some larger, more established companies too. Chand Lall looks for good quality companies, whose shares are reasonably priced and either pay a steady dividend now or will increase their dividend pay-out over time.

Stock ideas for investment are generated from an investable universe of 700 income paying stocks. Following analysis of financial statements and meeting companies’ management, there’s debate both within this team and across the wider group. Whilst the team sources ideas, Chand Lall is responsible for deciding how much to invest in each company. He prefers to hold a large number of stocks in the fund. There are currently 124, 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 the fund’s returns or the income received.

The biggest sector allocations in the fund are to financials and consumer discretionary stocks. In financials, top positions include investment company 3i Group and asset manager Polar Capital Holdings. Publishing house Bloomsbury publishing and house builder Vistry Group are among the fund’s most significant holdings in the consumer discretionary sector.

Chand Lall thinks that the financial ramifications of Russia’s invasion of Ukraine are likely to be felt globally for years to come which is likely to hit growth prospects in the UK.

Culture

Chand Lall and his colleagues work for Canaccord Genuity, which bought Hargreave Hale in 2017. Canaccord Genuity is 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 0.87%, but through Hargreaves Lansdown you can secure an ongoing saving of 0.19%. This means you’ll pay a net ongoing charge of 0.68%. 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

Siddarth 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*. As with any fund investing in smaller companies however, returns have been 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. 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. Some of the more cyclical sectors such as mining, travel & leisure and general retailers performed strongly whilst healthcare, utilities and oil & gas underperformed.

Over the last 12 months to the end of February 2022, the fund returned 10.21% vs the FTSE All Share return of 16.03% and the IA UK Equity Income peer group average of 13.36%. Over this period, our analysis suggests that the fund’s investments in the likes of Safestore holdings, Bloomsbury Publishing and Big Yellow Group have been among the largest contributors to performance. On the downside, Polar Capital Holdings and Strix Group have been among the weaker holdings in the fund. At the time of writing the fund has a dividend yield of 3.7%, although remember yields are variable and aren’t a reliable indicator of future income.

Past performance is not a guide to the future. *Source: Lipper IM to 28/02/2022.

More on Marlborough Multi-Cap Income, including charges

Marlborough Multi-Cap Income Key Investor Information