Richard Hallett, Manager of our Multi-Cap Growth Fund, explains how his portfolio companies have been able to successfully navigate recent challenges and why he believes these quality growth businesses will outperform over the long term.
Higher interest rates, rising inflation, the Ukraine conflict and concerns about Covid lockdowns in China are all contributing to uncertainty in financial markets.
Individual companies face clear challenges, as they contend with higher wage bills, steep increases in energy costs and continuing supply chain disruption.
However, when we talk to the management teams running our portfolio companies they tell us they are successfully navigating this period of turbulence. The vast majority report they are passing on rising costs to their customers and that, while they remain cautious about what lies ahead, they are currently trading in line with expectations.
We are far from complacent though. In recent months, we have exited our positions in several companies we felt may struggle to maintain growth in a more challenging macroeconomic environment. For example, we sold out of IT consultancy Converge Technology Solutions. The company is a consolidator, borrowing to make acquisitions, and in our view with interest rates rising this strategy looks less appealing. In addition, many of Converge’s customers are SMEs, which could be more vulnerable in a downturn.
High-quality companies with strong prospects
We have used the proceeds from recent sales to add to remaining positions in our portfolio – these are high-quality companies with strong long-term growth prospects that we believe have been significantly oversold.
They include veterinary pharmaceuticals company Dechra, digital publisher Future PLC, animal genetics business Genus, private debt manager Intermediate Capital, software company Kainos and scientific instruments maker Oxford Instruments.
While we remain vigilant, we believe the 46 first-class companies in our fund are well positioned to continue to grow despite a more challenging macroeconomic backdrop. These are businesses with strong balance sheets, high calibre management, robust recurring revenues and healthy cashflows. It is interesting to note that while companies have faced significant headwinds this year, we have not had a single profit warning in the portfolio.
The companies we hold are not pulling up the draw bridge and sitting back hoping for the best. Management teams recognise the crisis is also presenting opportunities. They are seeking to take market share from less robust rivals and many are making sensible acquisitions at significantly lower valuations. Dechra, for example, has announced one planned acquisition and already has another in the pipeline. Smart Metering Systems has also been on the acquisition trail.
Private equity houses clearly see value in companies at current share price valuations. We have had two portfolio holdings, home emergency repairs firm HomeServe and software business Ideagen, both acquired by private equity houses in recent months (we exited both positions after the takeovers were agreed). In addition, we are seeing increased share-buying activity by company directors, which indicates they too see attractive value.
Quality growth companies of the kind we hold in the fund have fallen out of favour with investors this year. However, in recent weeks, we have begun to see some positive share price moves. Commodity costs are falling and there are early signs the tight labour market could be starting to cool. If these factors feed through into lower inflation and reduced upward pressure on interest rates then this should be positive for quality growth companies. One of the reasons these stocks have fallen out of favour is that
inflation erodes the value of future profits, so if inflation begins to ease that should be supportive for growth stocks.
Looking ahead, we believe that for investors taking a medium to long-term view the sell-off has created a very attractive opportunity. Ultimately, our view is that well-capitalised, quality growth companies benefiting from long-term structural growth trends will outperform over time. We currently have a rare opportunity to invest in these companies at significantly reduced valuations.
Richard Hallett, 22/07/22
Capital is at risk. All views are the investment managers’ own and do not necessarily represent the views or opinions of Marlborough Fund Managers. Richard Hallett is the Investment Manager of the Marlborough Multi-Cap Growth Fund, which holds some or all of the stock mentioned. The views expressed are for general information purposes only and should not be construed as investment advice. The following is a summary only of some key items in the Prospectus and more details can be found in the Prospectuses. Investors in Protected Cell Company (PCC) must have the financial expertise and willingness to accept the risks inherent in this investment.
Past performance is not a reliable indicator of current or future performance; it may not be repeated and should not be the sole factor considered when selecting funds.
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