‘It’s a pretty happy situation for shares’
Britain’s smaller companies have delivered spectacular returns to investors in recent years. The sector has averaged a gain of 88pc over the past five years, versus 56pc for the FTSE 100 index. Giles Hargreave, manager of the Marlborough UK Micro Cap Growth fund, is arguably at the top of the pile when it comes to smaller companies. Over five years the fund has made an annualised return of 17pc, falling to a still impressive 14pc over 10 years, with the financial crisis included.
Telegraph Money spoke to Mr Hargreave about postreferendum momentum, his favourite stocks and why we’re into a new leg of the bull market.
What’s your basic stock-picking method?
We have a very big team; there are 14 of us managing the Marlborough funds.
We all have slightly different methods, but we analyse companies for all the normal things, free cash flow particularly. We look at valuation and relative valuation.
Niche is a word we use a lot. We think a lot of our companies are well placed because they have a niche.
Managing such a large number of holdings – more than 250 – does require a lot of work, but every stock in our fund is allocated to someone.
With small firms you can’t trade too actively in individual shares and it takes a long time to build up and sell a holding. There’s lots to do, but at the core of the portfolio you have stocks you hold for five or 10 years.
I’ve been doing it for long enough to know that sometimes you make mistakes, but I like to think that the diversity in our portfolio protects us from “single stock” risk.
The fund has bounced back impressively since the referendum. Why is that?
The whole market came back because of the devaluation of the currency. A devalued currency almost certainly leads to a higher stock market, because your earnings from overseas are going up.
The two-day shock took everyone by surprise. Then people started to buy, and they’ve been buying ever since.
Once the momentum got going it kept going – in fact the fund went up every day between August 5 and August 30.
We may now be looking at another leg of the bull market. There will come a time when it will go the other way, with inflation coming back, but for the moment it’s a pretty happy situation for shares.
Aren’t smaller companies more vulnerable because of exposure to the UK economy?
Looking at my top 10 holdings, I honestly can’t see an impact.
If you’re a house builder or a supplier to that industry, you’re bound to be under pressure if there is a slowdown. But that’s completely unproven so far, and I’ve hardly had a profit warning among my holdings in the past six weeks.
Giles Hargreave of Marlborough tells James Connington why the post-Brexit bull run has further to go
Could you name some of your favourite stocks?
The companies that have done the best for us have produced spectacular growth. Next 15 is a tech PR company that represents Facebook, Google and Microsoft. There’s good repeat business and a fantastic client list.
Accesso is a virtual ticketing company and companies such as Merlin Entertainments are keen to use the system. The shares have been amazing. It’s very expensive, but it’s unique.
Fever-Tree, the upmarket tonic water firm, is perhaps the best of all. It came to the market 18 months ago at 134p and today is trading at £10.
When do you sell?
I’ll definitely look past valuation, as we’re great believers in not snatching profits. If very good companies get pretty expensive in the short term there’s no point selling them, because you’re unlikely to get back in.
You have to be able to understand the quality of the company and if it’s something that is going to be there in five to 10 years and still growing.
Do you have your own money in the fund?
Absolutely, I own all of our funds. Not millions in each but a significant amount.
If you hadn’t become a fund manager, what would you have done?
I would have been a manager in the music business. How to buy the fund as cheaply as possible
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