Giles Hargreave and Guy Feld co-manage the star-performing Marlborough UK Micro-Cap Growth Fund (GB00B02TPH60), with the support of an investment team of around a dozen people. The £643.4 million unit trust’s objective is to deliver a total return of capital and income in excess of that achieved by the FTSE Small Cap Index (ex investment companies) over the medium to long term.

This is achieved through investments in the superior long-term growth potential of some of the UK’s smallest listed companies, many of which are highly innovative businesses or niche players. According to Morningstar, Marlborough UK Micro-Cap Growth is the best performing fund in the UK Small-Cap Equity category on a ten year annualised return basis.

Hargreave and Feld invest primarily in companies with a market capitalisation of £250m or less at the time of purchase and a considerable proportion of their top-performing portfolio is invested in sub-£150m companies. The charismatic Hargreave believes AIM is ‘a falsely criticised market’ and delights in putting money to work with tomorrow’s future corporate stars; around 75% of the portfolio is in AIM stocks.

‘There’s lots of high quality companies on AIM that are performing very well,’ says the seasoned small caps specialist, among the first to identify the potential of premium carbonated mixers marvel Fevertree Drinks (FEVR:AIM) and posh chocolates maker and retailer Hotel Chocolat (HOTC:AIM), backing both at IPO. He also put money to work with ten-pin bowling operator Hollywood Bowl (BOWL) as an investor at flotation.

Healthy spread

Hargreave argues one of the advantages of investing at this end of the market cap spectrum is the sheer number of companies to choose from. The AIM, FTSE SmallCap, FTSE Fledgling and FTSE techMark indices are home to well over 1,000 companies operating in diverse fields ranging from ‘big data’ management and software development to luxury soft drinks and pharmaceuticals.

‘We’re differentiated because of the spread,’ says Hargreave. ‘Marlborough UK Micro-Cap Growth is a very diversified fund and this diversification means that when you get a disaster, its not catastrophic for the fund,’ says Hargreave.

The size of the team means Hargreave and tech sector savvy colleague Feld have the resources to manage a highly diversified portfolio of around 250 stocks, with even the largest positions rarely representing 2% of the fund. Initial positions will usually be less than 1% and Hargreave will then average up as he sees evidence of a company successfully implementing its strategy. This diversification helps to manage stock-specific risk, with volatility below average for the IA UK Smaller Companies sector.

Hargreave, whose biggest holding is specialist marketing business Next Fifteen Communications (NFC:AIM), a PR firm with exposure to the high-growth US tech sector, explains ‘we start with small positions then increase them as we go along.’ Using their own primary research and meeting management teams face to face, Hargreave and Feld identify businesses with growth potential not yet reflected in the share price. Small caps have grown their earnings faster than larger companies historically – fleas can leap, elephants don’t gallop - and the pair see no reason why this trend should not continue.

Action man

‘We prefer growth to value and we like a bit of action,’ says Hargreave, adding ‘we don’t mind if a stock is expensive in the short term. We try very hard not to average down and tend to average up. On the good ones, you will make lots of money and on the bad ones, you’ll only lose your money once. From time to time, things can go wrong, which is why we have the spread.’

High-quality high flyers in the portfolio include the aforementioned Fevertree: ‘We still do like it, as its a fantastic international brand, but we have taken some off the top,’ Hargreave notes.

Another strong contributor to the fund’s performance is Keywords Studios (KWS:AIM), the computer game translation specialist bought at an entry price of 123p in July 2013 that has rocketed north to 445p at the time of writing, Marlborough having averaged up at various prices along the way.

A further winner, albeit the shares have pulled back a bit of late, is Smart Metering Systems (SMS:AIM), an operator in the industrial and commercial gas meter market. Hargreave is excited by the key opportunity for SMS, which is the opening up of retail smart metering.

‘We’re all going to have to have smart meters in our homes and Smart Metering is a roll-out story – the market loves roll outs,’ says Hargreave, who highlights that beyond the roll-out phase, Smart Metering ‘will have fantastic cash flow’.

New additions

‘We don’t have any housebuilders in this fund,’ says Hargreave, addressing the Brexit theme, ‘and we have also done well out of Highland Gold Mining (HGM:AIM).’ The manager also highlights a new purchase in GB Group (GBG:AIM), the identity security management specialist, and says ‘we’ve also just bought GAMES Workshop (GAW) – it looked very cheap and had a big yield on it.’

Hargreave adds: ‘We tend to invest in most of the best-performing small cap stocks. If we see something moving, we’ll go have a look at it and buy it.’ A terrific example of this is Gear4music (G4M:AIM), the web-based musical instruments purveyor whose shares have ‘re-rated explosively’ with the help of a weak sterling tailwind. ‘We’ve woken up to the fact that this is a really successful online retailer,’ he says.

Giles Hargreave

Giles Hargreave and Guy Feldco-manage the star-performing Marlborough UK Micro-Cap Growth Fund

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