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Marlborough’s European fund finds audience after 20 years

Marlborough’s European fund finds audience after 20 years

In the latest instalment of our series, we look at funds that are building sufficient assets and track records to be coming onto your buy list radar. 

For a fund that is over 20 years old, it has really been the last four of those that have transformed the fortunes of the Marlborough European Multi-Cap fund, during which it has grown more than 40-fold in size.

Launched in 1986, the fund had been one of the less celebrated members of the Marlborough stable until Hargreave Hale took over as investment adviser in October 2013.

The two companies have long worked together, most notably through Giles Hargreave’s UK Special Situations fund, but Citywire AA-rated David Walton is proving that the firm’s small cap expertise is not just domestically-focused.

‘We sat down with Marlborough to agree a new strategy for the fund and we said Hargreave Hale’s strength lies mainly in small and mid caps, so we were given that ability to invest there, but we also have the flexibility to invest in large caps,’ said Walton (pictured).

‘That was my background, running smaller companies portfolios at Baillie Gifford.’

Back then, the fund was only £6.5 million in size and Walton said the initial target was to grow it to at least £50 million, to make it economically viable. As its track record built, so too did the assets, and they have long since more than surpassed those modest initial aims.

‘The fund was very small at the start, but is £270 million now. At the end of November last year it was £60 million, so we’ve had large inflows this year,’ he said.

‘We’re on one or two wealth manager buy lists, but we’ve really been supported by smaller IFA groups who’ve recognised that the strategy is delivering good results and people are familiar with Hargreave Hale’s approach.’

The proof is in the numbers and the fund is currently sitting top of the peer group over three years to the end of July, up 96.4% versus a sector average of 48.7%. Over one year it has risen 39.3% compared to the peer group’s 22.9% gain. This strong performance led to Walton scooping the Best Europe ex-UK Equity Award at the inaugural Citywire UK Awards, earlier this year.

However, Walton is sanguine about his impressive numbers, pointing out that although the fund has delivered strongly, particularly over the last two years, it lagged in 2014 when small caps were out of favour. He is all too aware that if investors turn risk-off again, then it could ‘perform less well’ again.

However, the fund’s different approach to many of the stalwarts in the sector means that it is positioned as a diversifier and complementary holding.

Investment approach

The investment process underpinning the fund sounds simple and is in keeping with Hargreave Hale’s wider strategy of running diversified portfolios of predominantly smaller companies, with quant screening supplemented by company meetings. Really knowing and understanding the management is key.

‘We buy stocks with three characteristics: above average growth, well-managed and where the price is cheap. This process drives us to have over half of the fund in small and micro caps, where you tend to find higher growth and cheaper valuations, because they are less well-researched,’ Walton said.

‘We also find ideas, although far fewer, in mid and large caps, perhaps if they’ve had a setback. We own Ryanair, for example, which sold off heavily around Brexit, which we took as an opportunity to increase our holding.

‘Ryanair is the lowest cost European airline, which gives it a strong advantage over the other airlines. Having some mid and large caps helps mitigate the risk of investing in smaller companies.’

Walton describes his sell discipline as basically the reverse of his buy triggers, with a belief that a company is no longer able to grow at an above average rate, a change of strategy or a stratospheric valuation typically catalysts to reduce.

Individual holdings are capped at around 2%, although he will ‘let the winners run’, and the fund tends to have around 130 holdings, adding diversification. This is not capped by country as such, with Walton again stressing the team’s bottom-up approach as the key definer of the portfolio’s make-up.

Stock examples

Highlighting a number of stocks currently in his top 10 holdings, Walton points to Skandiabanken as a disruptor, with the Norwegian internet-only bank able to undercut its incumbent rivals, given its lower cost base and lack of a massive branch network.

Underlining the diversity of companies in his fund, Walton also owns Spanish stock Telepizza, which after a lacklustre float, has picked up and is now expanding in Latin America.

‘It had a very disappointing IPO where the shares fell and we took that as an opportunity to take a holding at that point. It has a strong business in Spain and is also expanding in other geographies, including Latin America.’

Underlining his sell discipline, he recently exited German automotive supplier MBB on valuation grounds after a strong run.

‘One of its businesses is manufacturing equipment to make electric cars. We felt it had become quite speculative about whether that many more electric cars would be made over the next one or two years and there was potential for disappointment if demand is not as strong as expected.’

Fund in focus

Fund: Marlborough European Multi-Cap

Managers: David Walton

Launch date: May 1986

Current manager tenure: 3 years, 11 months

Fund size: £270 million

Number of holdings: 126

Average turnover: c20-25%

Ongoing fund charge: 1.65%

Manager invests in own fund:
‘A decent amount and continuing’

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