Marlborough Multi Cap Income: March 2023 fund update

• The fund has exposure to small and medium-sized companies offering potential for growth and diversification in income but this also adds risk
• Siddarth Chand Lall has managed the fund since its launch in 2011 and has the support of three analysts
• The fund’s return over the last year has lagged the FTSE All Share index and the IA UK Equity Income peer group sector average
• The fund was removed from the Wealth Shortlist in December 2022

How it fits in a portfolio

The Marlborough Multi Cap Income 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 add diversification to UK equity income funds focused on larger companies or add equity exposure to a broader income portfolio. The focus on smaller companies increases risk and the potential for volatility.

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.

In October 2020 industry veteran Giles Hargreave stepped down as head of investment but retains a consultancy role within the Canaccord group. Longstanding colleague Richard Hallett replaced Hargreave, which ensures continuity of the investment approach.

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

Chand Lall has also managed a global equity fund since February 2021. We do not think this additional responsibility offers significant synergies with running the Multi Cap Income fund.

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 from 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 are expected to 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, 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 114, although it has peaked nearer 150 at times. This is 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 financial and industrial stocks. In financials, top positions include asset manager Polar Capital Holdings and investment company 3i Group.

The manager has made some changes to the fund over the last 12 months. This has included reducing the fund’s exposure to companies in the property sector including Watkin Jones and Taylor Wimpey. Some existing investments have also been added to over the period following good trading updates including packaging business DS Smith and food & beverage supplier Tate & Lyle.

Culture

Fund managers 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, which seems to work well and suit everyone involved.

ESG Integration

Marlborough's focus on smaller companies means integrating Environmental, Social and Governance (ESG) factors is more challenging, given a lack of external research coverage and quality ESG data. However, the firm is increasingly considering ESG factors, with a focus on governance, and has bolstered the quality of the ESG data available to them by incorporating insights from fund managers and analysts. We will continue to monitor how the firm's approach to ESG evolves over time.

Some Marlborough fund managers have told us they've begun tracking companies to see how they improve on ESG, and whether they're doing what they said they would. The managers have suggested they'd be prepared to sell a company if ESG concerns couldn't be resolved. Even so, we believe Marlborough's ESG integration is at a very early stage, and engagement activity is not as systematic as some peers.

Cost

The fund has an annual ongoing charge of 0.85%, but through Hargreaves Lansdown you can secure an ongoing saving of 0.19%. This means you’ll pay a net ongoing charge of 0.66%. 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 returns of 109.55%*, compared with 108.69% for the FTSE All-Share index**. As is typical of funds investing in smaller companies, 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 course of 2022. It's important to remember that smaller companies are less liquid, which can heighten falls if many investors try to sell at the same time.

Over the last 12 months, the fund has delivered a return of -5.92%, lagging the IA UK Equity Income peer group sector average return of 6.84%, and the FTSE All Share index return of 7.30%. Over this period, our analysis suggests that the fund’s investments in private equity investment company Intermediate Capital Group and self-storage provider Safestore Holdings have been among the larger detractors from performance. Some of the fund’s holdings have performed better though. Our analysis suggests that financial stock, Paragon Banking Group and private equity investment company 3i Group have been among its better performers. Past performance isn’t a guide to the future.

Past performance is not a guide to the future. *Source: Lipper IM to 28/02/2023.

** This uses the fund’s A share class which has been available since launch on 01/07/2011.

More on Marlborough Multi Cap Income, including charges

Marlborough Multi Cap Income Key Investor Information