Mark Dampier: Looking to smaller firms to lighten stocks gloom

The Analyst

I have rated Giles Hargreave highly as a stock picker for many years. His Marlborough Special Situations and UK Micro-Cap Growth Funds have been exceptional, and I was therefore excited by the launch of the new Marlborough Multi Cap Income Fund in June last year. The fund, managed by Giles Hargreave and Siddarth Chand Lall, aims for a combination of income and capital growth, blending established dividend payers with exciting smaller company stocks.

Last summer was a difficult time to launch a new fund. The fear of a global macroeconomic slowdown and an intensification of the eurozone debt crisis caused severe volatility, and the market now stands significantly lower than it did when the fund launched. However, it was important to establish a dividend stream as early as possible to provide investors with a reasonable first income payment. The managers therefore invested around two thirds of the money fairly quickly with the remainder following over the next quarter. Given the turbulent conditions, the fund has held up fairly well.

Running an income fund is a slight departure for Mr Hargreave as he tends to look for small, growth-orientated companies. Yet in his research he sees plenty of firms with good dividend records, so applying his expertise to this area should be a natural progression for him. With the majority of the portfolio devoted to small and medium-sized companies it is also genuinely different to most equity income funds, which means it dovetails nicely with some of the better-known funds in the sector, such as Invesco Perpetual High Income, Artemis Income and PSigma Income. They are all larger company orientated, whereas Marlborough Multi Cap Income has only around 10 per cent invested in FTSE 100 companies.

A focus on smaller companies can, of course, increase risk. To help reduce it, the fund has a wide spread of holdings – well over 100. There is no shortage of opportunities. The FTSE 100 contains 91 dividend-paying firms, but cast the net across the whole UK market and there are 717 companies to consider. Mr Hargreave looks for a dividend yield of at least2 per cent and a growing payout, which cuts down the field to around 500.

At 63, Mr Hargreave is the oldest in the team, and there is a good mix of experience and up-and-coming talent. Siddarth Chand Lall, for instance, is 32, but the other four members of the investment team have over 125 years of market experience between them, and all are involved in meeting company management. This is at the heart of their process and they typically meet 25 companies a week between them, often using Mr Hargreave's long-established contacts.

In a recent update with the team, I was intrigued to see how they felt about the current economic situation. While this is primarily a stock-picking fund, it is impossible to ignore the wider picture, especially at the moment. Indeed it is often useful to hear about the insights they receive from company management. Interestingly, I found the team quite bullish. Many companies are trading well, with the environment notably improving in the US. Naturally sentiment could take a turn for the worse given what is going on in the eurozone, but Mr Hargreave is finding many companies at attractive valuations.

The fund will not be as aggressive as the Marlborough Micro-Cap Growth or Special Situations funds, but an estimated yield of more than 4 per cent should be attractive to many investors, especially given that the income should grow over the longer term. In addition, a handful of stocks in the fund are non-dividend payers where the team have identified the potential for dividends to be introduced, potentially providing additional uplift.

The fund has shown a pick-up in performance recently, clawing back some of its initial losses. With so much pessimism in this market any kind of sentiment change is likely to have a big impact on many of the companies the fund owns, so it's definitely one to tuck away for the long term, in my view.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit hl.co.uk/independent

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