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Fund research

Marlborough UK Micro-cap Growth: January 2023 fund update

In this fund update, Senior Investment Analyst Joseph Hill shares our analysis on the manager, process, culture, ESG integration, cost and performance of the Marlborough UK Micro-cap Growth fund.
Marlborough

Important information - This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 2 years old

It was correct at the time of publishing. Our views and any references to tax, investment, and pension rules may have changed since then.

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

How it fits into 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.

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. In January 2021, Eustace Santa Barbara was appointed co-manager alongside Feld. He has over 17 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 a good track record and they leave few stones unturned when it comes to finding small companies with big potential.

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. Currently around 47% of the fund's investments are in companies valued at less than £250m.

The managers run a diversified portfolio of around 190 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 managers recently increased their investments in the software and computer services sector topping up Zoo Digital and FD Technologies, while they trimmed their position in Serica. The fund can invest in unquoted companies. At the end of December, this accounted for around 1.46% of the portfolio. Investors should be aware that investment in unquoted companies is higher risk and they can be considerably less liquid (their shares are harder to trade) than those traded on established stock exchanges.

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, and 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 a standard annual ongoing charge of 0.80%, but we've secured a 0.09% saving for HL clients. That means a net ongoing charge of 0.71%. The fund discount is achieved through a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP. 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 performed well. Over this time, it's returned 222.24%* vs 186.76% for the FTSE Small Cap (ex Investment Trust) index. It's also outperformed the 169.12% 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 UK Smaller Companies sector average. Although, 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 past year the fund returned -33.77% to investors, underperforming the FTSE Small Cap excluding investment trusts benchmark return of -17.31%. Among the most significant detractors from performance over this period were eyewear company Inspecs group and content and intellectual property services company RWS. Some of the fund's holdings performed better though. Among these better performers were semiconductor business IQE, and software provider, Cerillion.

Annual percentage growth
Dec 17 -
Dec 18
Dec 18 -
Dec 19
Dec 19 -
Dec 20
Dec 20 -
Dec 21
Dec 21 -
Dec 22
Marlborough UK Micro-Cap Growth -10.13% 21.19% 22.68% 24.69% -33.77%
FTSE Small Cap ex Investment trusts -13.80% 17.68% 1.65% 31.26% -17.31%
IA UK Smaller Companies -11.83% 26.21% 7.26% 22.82% -25.66%

Past performance is not a guide to the future. *Source: Lipper IM to 31/12/2022.

More on Marlborough UK Micro-Cap Growth, including charges

Marlborough UK Micro-Cap Growth Key Investor Information


Important information - Please remember the value of investments, and any income from them, can fall as well as rise so you could get back less than you invest. This article is provided to help you make your own investment decisions, it is not advice. If you are unsure of the suitability of an investment for your circumstances please seek advice. No news or research item is a personal recommendation to deal.
Written by
Joseph Hill
Joseph Hill
Senior Investment Analyst

Joseph is part of our Fund Research team. Having joined HL in 2017 initially on a graduate scheme, he's now integral to our analysts who select funds for our Wealth Shortlist. He also analyses the UK Growth, UK Equity Income and UK Smaller Companies fund sectors, providing expert insight for our clients.

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Article history
Published: 25th January 2023