Veteran small-cap stockpicker Giles Hargreave has two connections with the world-famous detective Sherlock Holmes.
Not only is his London office at 44 Baker Street, not far from the 221b address Sir Arthur Conan Doyle created for his stories, but he also went to the same high-profile public school as the actor Benedict Cumberbatch, who plays Sherlock in the latest BBC series.
Hargreave’s privileged background at Harrow School followed by Cambridge University catapulted him into the City to his first job as a leisure analyst at James Capel, which he describes as the first stockbroker “to have a decent research department”.
From there, a stint at a music business company which “wanted some posh bloke from the City to come and work for them” was followed by setting up his own investment management firm, Hargreave Investment Management, in the early ’80s, and towards the end of that decade he merged with the family stockbroking business, Hargreave Hale, in Blackpool.
In 2000, the business was incorporated and Investec Bank bought 35% of the new vehicle, leaving 65% in his and his family’s hands.
That is still the situation 14 years on, except there are now around 180 people employed in London, Blackpool and various other offices, with about £3.5bn under management of which £2.25bn is invested in Marlborough funds.
Marlborough has always been the administrators, and it does the marketing and pretty much everything else except for the investment management.
It’s elementary…
The flagship Marlborough Special Situations Fund is run out of the office in Baker Street, which Hargreave is happily situated in now having converted it about a year and a half ago, though he says it has taken him “30 years of wandering around the West End from one scrappy office to another to get something decent”.
Since he was appointed manager in July 1998, the fund has returned an astonishing 1,856% (Morningstar data to 28 Feb ’14), which makes it the top performer of all UK-authorised unit trusts and OEICs investing in UK equities over that period. By comparison, the IMA UK Smaller Companies sector average saw growth of 285% and the FTSE All-Share was up 121%.
The portfolio is constructed primarily on a ‘bottom-up’ basis and the stock-picking skill of Hargreave and his team is one of the major drivers attributed to the fund’s long-term performance.
Importantly, Marlborough International Management launched Guernsey-domiciled feeder funds for the Marlborough Special Situations Fund and the Marlborough High Yield Fixed Interest Fund in June 2013, opening up these funds to offshore investors for the first time.
Last month, Marlborough added Multi-Cap Income, UK Micro-Cap Growth, UK Multi-Cap Growth and European Trust funds to this feeder arrangement. All six funds are available in sterling, US dollar and euro currency denominations.
Initial target markets are Europe, the Channel Islands, the Middle East and the Far East, available through the platforms of a number of offshore life companies including Royal Skandia, Friends Provident International, RL360° and Generali.
The Special Situations Fund currently has £815m under management, invested in 191 stocks of which five are in the FTSE 100, 48 in the FTSE 250, 34 in the FTSE Small Cap and 104 on AIM.
A curious incident
Hargreave is surprised that more companies have not moved over to an AIM listing, given the extensive tax breaks, including IHT relief inside an ISA wrapper after owning the shares for two years.
“I think in the end they will, when people cotton on to the attraction. The AIM market is going to be of significant interest for years to come as long as the tax breaks remain in place.
“In our private client department we have got quite a lot of clients who have switched their ISAs out of blue chips into AIM stocks. You might think that is a dangerous thing to do, and maybe to some extent it is, but the reality is there are a lot of very high-quality stocks on AIM.”
One AIM stock in the special situations fund Hargreave highlights enthusiastically is a sizeable holding in Restore, the larger part of which provides storage.
“At the beginning of the year they can probably tell you where 80% of their revenue is going to come from. So the visibility and the cash flow are very good. It’s also got very good management.”
Its market share has grown and the stock has been re-rated, he adds: “We bought the stock originally at 25p and now it’s now 175p. It’s a very high-quality company. If it doesn’t buy anything it will have no debt by the end of next year with the cash it’s generating, but hopefully it will make acquisitions.”
Know your methods
Hargreave says many would consider the Special Situations portfolio to be overly diversified but the reality is that there is a big team which gives the capability of covering a high number of stocks.
“There are about 12 experienced fund managers/analysts working here plus assistants, and that enables us to cover pretty much all the stocks that we own. We have a meeting every Monday where everybody discusses the stocks and any events that have happened.”
The single biggest holding in the fund is technology company Plus 500, “another great company” which deals in contracts for differences on its platform, while in the Small Cap Index the biggest holding is RPC, a European packaging business, followed by TT Electronics, which makes sensors for car manufacturer BMW and others.
He also explains about Telecom Plus, “a fantastic company” which gets people to switch their electricity or gas provider, giving existing customers the incentive to get friends and neighbours on board too by paying them a commission for the introduction.
“It works a treat, they have a huge salesforce they don’t have to pay.”
He can’t tell me about the most recent share he has purchased for the portfolio, but he does point out that he has been playing some of the IPOs, such as Boohoo.com.
“We’ve sold because they went up a lot. They were placed at 50p and they opened at 85p and they have since come down to 60p. We thought it got too expensive.”
He describes the Special Situations fund as “primarily a small-cap fund (60%) with quite a lot of mid cap in it (40%).”
“The key is the stock picking and that’s what matters. And running your winners, cutting your losers, averaging up holdings and not averaging them down.”
He certainly does not describe the process of research and selection of small company shares as challenging, which others might do.
“We love it. Because we are known to have significant funds available for small caps, the companies or the brokers bring the companies in to see us. So we see pretty much everything that is going on in the small-cap world and it’s very enjoyable. And we have a big team here so we have big coverage.”
As for the sectors he likes, he picks out online, “quality retail, like Ted Baker, Sports Direct, and Dixons” and industrials “up to a point”.
All these companies are so different which is why defining them as support services or industrials can get very misleading, Hargreave says.
Another top 10 holding, not in an area you might expect, is Amerisur Resources, an oil exploration and production company in Columbia which most unusually owns 100% of the oil field where it’s producing, and also has nearby land which represents a “tremendous exploration play”.
“That’s absolutely where you want to be at the moment because the pound has been very firm, more to the point because of the improving economy. It’s extraordinary what’s going on.”
By this, he means in normal circumstances you would expect inflation to be picking up with the economy.
“Well that’s just not happening this time. Inflation is going down even though the economy is surprisingly strong. It’s an amazingly good situation to be in whatever anybody else may say. So, for that reason if nothing else, I can’t help feeling optimistic because there is no pressure to put interest rates up.”
