FUNDS

The for­mer Schroders man­ager is set to launch Tell­worth UK Smaller Com­pa­nies Fund

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Small cap fans: get ready for the re­turn of cham­pion in­vestor Paul Mar­riage

Awell-known fund man­ager who in his pre­vi­ous job gen­er­ated nearly four times as much money for in­vestors than the broader mar­ket is back with a new fund.

Paul Mar­riage made his name at Cazen­ove and Schroders, par­tic­u­larly with Schroder UK Dy­namic Small Com­pa­nies Fund (0721936) which re­turned 435% ver­sus 114% from the bench­mark FTSE Small Cap in­dex in the 11 years he ran the fund.

Mar­riage left Schroders in 2017 and to­gether with for­mer col­league John War­ren set up Tell­worth In­vest­ments. The pair plan to launch Tell­worth UK Smaller Com­pa­nies Fund at the end of Novem­ber and fol­low the same in­vest­ment process as they used at Schroders.

The port­fo­lio is ex­pected to have 15 to 20 of the same hold­ings as fea­tured in the Schroders small cap fund when they left last year. Over­all the fund man­agers want to build a port­fo­lio of 40 to 60 po­si­tions with a three-year typ­i­cal hold­ing pe­riod.

‘We had a de­cent record at Schroders and I’m not go­ing to change the sys­tem I de­vel­oped in 2000. We made good money for in­vestors and I will try to re­peat this,’ says Mar­riage.

THE IN­VEST­MENT PROCESS

His process be­gins by ex­clud­ing the high­est risk ar­eas in the small cap world, namely oil, gas, min­ing and biotech firms. He also ex­cludes fi­nan­cial bro­kers to avoid any con­flicts of in­ter­est.

‘Small cap in­vest­ing is a great place to make money but also a place to lose money. I have a his­tory de­gree, not an ex­plo­ration or science de­gree, and his­tory tells me not to bother with re­sources or biotech.’

Mar­riage then strips out com­pa­nies which aren’t based in the UK, even though he is happy to own qual­i­fy­ing ones that have in­ter­na­tional op­er­a­tions. He doesn’t want to travel be­yond a long train or short plane ride to meet man­age­ment, plus he wants the flex­i­bil­ity of drop­ping in on com­pa­nies if he is near their fac­to­ries or of­fices.

Once com­pa­nies worth less than £50m are stripped out, the fund man­ager says he is left with an in­vest­ment uni­verse of 600 stocks. ‘Our bread and but­ter is meet­ing com­pa­nies and pick­ing stocks. If we can do 300 com­pany meet­ings a year, we can get through our in­vest­ment uni­verse once every two years.’

The Tell­worth ex­pert

nar­rows down the list by us­ing pro­pri­etary data-driven screens. ‘We look at eco­nom­ics via our “Ther­mo­stat” screen; we look at red flag com­pa­nies with per­sis­tent ac­count­ing is­sues called the “Sin­ners” screen; and we use the “Al­pha Seeker” screen to find com­pa­nies whose growth is be­ing un­der­val­ued by the mar­ket.’

This process throws up stock ideas and it also high­lights ones to drop from the list, leav­ing the fund man­ager with a more man­age­able fi­nal 50 names, on av­er­age.

WHEN WILL IN­VEST­MENTS BE SOLD?

New in­vest­ments are given about six months to prove their worth oth­er­wise they are thrown out of the port­fo­lio. Mar­riage sells on the first profit warn­ing and also starts trim­ming once a po­si­tion has made at least a three-times re­turn.

A les­son was learned in 2014 when the fund man­ager held on to his win­ners too long and was caught out when some of them fell back sharply. ‘I needed this ex­pe­ri­ence to let me learn the im­por­tance of get­ting out.’

LOOK­ING FOR BAR­GAINS

This au­tumn’s stock mar­ket sell-off has seen a lot of high­fly­ing AIM stocks rapidly lose value. Many in­vestors will have been dis­ap­pointed with this move­ment, but not Mar­riage.

‘It gives me great joy to see these highly-rated stocks come back down. It was a long over­due re­al­ity check. The fact the top end of AIM is trad­ing on 38 times earn­ings is nuts.

‘For ex­am­ple, ASOS (ASC:AIM) – while not in the small cap space – is trad­ing on 47 times earn­ings de­spite not hav­ing any earn­ings up­grades since 2014. It amazes me why some in­vestors would pay that rat­ing now.’

The man­ager ar­gues the sell-off is good for the launch of his new small cap fund as he can pick up some stocks at favourable prices. Mar­riage says he’s got his eye on some good qual­ity com­pa­nies which he’d be happy to buy at 15 times earn­ings and which are now trad­ing on 12-times.

He says di­ver­si­fied hire busi­ness VP (VP.) par­tic­u­larly stands out in the cur­rent sell-off. Its shares have fallen by 15% since Au­gust and now trade on a mere 10.2 times fore­cast earn­ings for the cur­rent fi­nan­cial year.

‘They do lots of dif­fer­ent things and have a strong fam­ily own­er­ship in the firm which I like, as fam­i­lies take a long-term view.’

Re­tailer TheWorks.co.uk (WRKS) has also caught his eye, say­ing it is a good qual­ity busi­ness with a de­cent op­por­tu­nity. It just needs to meet earn­ings ex­pec­ta­tions set at its IPO in or­der to fully con­vince Mar­riage.

He reck­ons The Works – as it is bet­ter known – is tak­ing ad­van­tage of WH Smith’s (SMWH) strate­gic shift to fo­cus on travel out­lets, as that leaves a gap on the high street to of­fer sta­tionery, school stuff, gifts, books and the lat­est play­ground craze.

MAIDEN HOLD­INGS FOR THE FUND

Elec­tron­ics group Gooch & Housego (GHH:AIM) has been flagged as a likely port­fo­lio hold­ing, boast­ing a mar­ket lead­ing po­si­tion in its cho­sen niche, man­age­ment as long­stand­ing share­hold­ers, and po­ten­tial for mar­gin growth. In­dus­tri­als group Renold (RNO) is also likely to join the port­fo­lio, says the fund man­ager.

He con­cludes: ‘One rea­son we were fairly suc­cess­ful in the past is be­ing con­sis­tent with our ap­proach and not be­ing dragged into mini bub­bles or stuck in junk.’ (DC)

Gooch & Housego is likely to ap­pear in the fund’s port­fo­lio

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