Fund in Focus podcast: Multi-Cap Growth

Richard says analysis shows valuations of UK stocks are on an average discount of 18% to comparable businesses in other developed markets. His view is this discount, which increases as you move down the market cap spectrum, will not last indefinitely.

He adds that at current share prices he is genuinely enthused about the prospects for the 50 or so companies in the portfolio, which he believes have outstanding growth potential.

In the podcast, Richard explains the investment process he uses to select companies for the fund. He has the freedom to roam across the market-cap spectrum, identifying the companies with the strongest growth potential, whatever their size.

He looks for companies with a sustainable competitive advantage he believes will enable them to continue growing regardless of what is happening in the wider economy. He also wants to see that a company is in a niche business area, with few competitors, and, critically, that the business is benefiting from a long-term structural growth trend.

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Fund in focus: Multi-Cap Growth September 2023

Transcript:

[00:00:00] Nick Peters: Hi, this is Nick Peters. Welcome to this regular Marlborough Fund podcast where we discuss with one of our fund managers pertinent points about their fund and its strategy. This week we’ve been joined by Richard Hallett who is the lead manager of the Marlborough Multi-Cap Growth Fund.

[00:00:18] Nick Peters: Richard was appointed to the fund in 2005 and has established a very strong long term track record. Richard, thanks very much for joining us.

[00:00:27] Richard Hallett: Pleasure, Nick.

[00:00:28] Nick Peters: So we’ll start with a gentle opening first question. Can you give us an overview of the fund, what it’s striving to achieve, and how?

[00:00:36] Richard Hallett: Well, what we’re looking to do is achieve strong capital growth for our investors by investing in approximately 50 truly exceptional companies that really befit our exacting criteria and really just holding onto them for the longer term.

[00:00:52] Richard Hallett: And whilst our primary focus of course is UK companies, we also hold some outstanding overseas stocks and we really do have the freedom to roam right the way across the market-cap spectrum and we’re looking for companies with the strongest longer-term growth potential, really, whatever their size.

[00:01:11] Richard Hallett: We have a well established investment process which is both consistent and scalable and we’re ideally looking for companies with a sustainable competitive advantage that gives these businesses the resilience to grow regardless of what’s going on in the wider economy.

[00:01:27] Richard Hallett: That competitive edge may be an innovative product, a strong management team, or indeed a great brand that people love but in reality, it’s usually a combination of these sorts of factors.

[00:01:40] Richard Hallett: The type of business sector in which they’re operating in as well is incredibly important. We’re looking for leaders in niche areas where there aren’t many competitors and crucially, we’re looking for companies operating in sectors that are benefiting from longer term structural growth, what we call a secular growth trend.

[00:01:58] Richard Hallett: And a good example is energy efficiency, there is a clear need to cut fossil fuel emissions, and we’re also dealing with steep increases in energy costs, and there’s also concerns around energy security. And this is really driving nations around the world to really focus in on energy efficiency. So this is a really strong longer term trend and one company we’re seeing benefiting from this is Volution Group.

[00:02:23] Richard Hallett: It is a supplier to the construction industry with market leading ventilation equipment, increasing energy efficiency and avoiding air quality problems in the modern highly insulated home. So we see this as a company really strongly positioned for growth.

[00:02:38] Nick Peters: That exposure to non UK companies is a key differentiator to your peers, is that likely to continue?

[00:02:46] Richard Hallett: Well, the UK stock market is really home to a substantial number of absolutely world class companies which are global leaders in their fields, and these will always represent the lion’s share of our portfolio.

[00:02:59] Richard Hallett: However, our investment process is global, when we’re looking at structural growth trends, competitive threats, or indeed longer term opportunities, we really are analysing what’s happening with companies all the way around the world.

[00:03:12] Richard Hallett: For example, when we’re looking at a structural trend, from time to time, we’ll find an overseas listed company, which is just much stronger position to exploit that opportunity, and if we see that company as being really best of breed and with really exciting longer-term prospects, then we’ll consider giving that company a place in the portfolio.

[00:03:31] Richard Hallett: I mean, a good example is Novo Nordisk, which is listed in Denmark. It’s a global leader in drugs for diabetes and weight loss and recent trials have shown that it’s leading obesity care drug, Wegavi, also cuts the risk of heart attacks and strokes. And we see this as increasing the demand for this drug, further boosting Novo Nordisk’s really exciting prospects.

[00:03:55] Nick Peters: Some of those overseas stocks have helped recent performance and the relative performance has really picked up this year. What else do you put that down to?

[00:04:03] Richard Hallett: Well, in a world of higher bond yields, growth company future profits have become less attractive, with many investors deciding they’d rather have the jam today available from coupons on fixed interest securities, for example.

[00:04:16] Richard Hallett: And this has led to a material derating of the fund’s holdings, particularly over the first three quarters of last year, as bond yields continue to ratchet up higher and higher. But since October last year, whilst 10 year bond yields have continued to be very volatile, they’ve remained quite range-bound.

[00:04:35] Richard Hallett: And this has provided a much more stable backdrop to growth stock valuations, with investors just tentatively starting to look once more at company fundamentals. And this is offering a much more positive environment for our companies, with most holdings having begun to rebound quite a lot from the extreme lows of October 22.

[00:04:55] Richard Hallett: So despite this challenging economic backdrop that we find ourselves in, the vast majority of our companies have continued to trade quite strongly, issuing trading statements in line or indeed, in many cases, ahead of expectations. And we believe that these are the companies that will outperform over the longer term.

[00:05:13] Nick Peters: Thank you, and can you give us a specific example of a stock that’s contributed to that turnaround in performance?

[00:05:20] Richard Hallett: Yes, of course. A good example would be Network International, which is a company we’ve held for a number of years. It is a dominant provider of digital payment services in the Middle East, but the company has really suffered over the last few years, particularly during the pandemic, which reduced demand for tourism and travel.

[00:05:38] Richard Hallett: But recent trading has been much more robust. And we also see this digital payment sector as offering really strong growth over the longer term. The stock is up about 30 percent year to date, having received two private equity led bids, with Brookfield winning the process. And we really see this acquisition and a flurry of other M&A activity over the last few months really indicating to us that UK equities are just fundamentally undervalued.

[00:06:06] Richard Hallett: That’s in part because international investors remain concerned about political uncertainty and also the lingering effects of Brexit. Simon French, the chief economist at Broker, Pameo Gordon recently did a study where he showed that on average, most companies in the UK were trading at discounts of up to 18 percent to comparable businesses elsewhere, and that this discount only increases as you move down the market cap spectrum into the smaller UK company. And in our view, this is quite significant discount will not last indefinitely.

[00:06:40] Nick Peters: Okay, I think we all agree with you on that point. Now, looking ahead, and I realise it’s like asking which is your favorite child, but which stock in the portfolio most excites you currently?

[00:06:53] Richard Hallett: Good question, but certainly where we are at the moment with current valuations where they are, we are genuinely enthused about all the prospects of all companies in the portfolio.

[00:07:04] Richard Hallett: After all, this is a A high conviction portfolio and we only hold companies which we believe have the most outstanding growth potential. They share many of the same characteristics, being leaders in their sectors, with large addressable markets, and they’re really benefiting from one or more longer-term structural growth trends.

[00:07:22] Richard Hallett: But if I were to highlight one company, then perhaps it’s only natural to mention the fund’s largest holding, which is Ashtead Group. It’s a FTSE 100 constituent, it’s one of the largest equipment rental businesses in North America. It’s a leader in its sector, continually taking market share through a combination of compelling customer service, but also the acquisition of smaller regional competitors.

[00:07:47] Richard Hallett: So we’re looking for longer-term structural growth trends and Ashtead we see as benefiting from the move away from ownership towards rental. And in addition, the company benefits from the many US government subsidies that are currently increasing spend on infrastructure projects, stimulating demand for its bulldozers and earth digging equipment.

[00:08:08] Richard Hallett: Like the many other companies we hold in the fund, we believe this is a strong, well managed business with exceptional longer-term growth potential.

[00:08:15] Nick Peters: Almost inevitably in a diversified portfolio, they’re going to be stocks that don’t deliver and a sort of problem child if you like. Can you give us an example of one of those where you’ve actually had to sell the stock?

[00:08:28] Richard Hallett: Yes I mean the thing is we’ve only bought and sold relatively few stocks over the last 18 months or so and that’s generally because we’ve been very pleased with the operational performance and resilience shown by most of our companies, but of course we’ve had disappointments, and one of them is auction technology group, which is a provider of online auction sites and services in Europe and indeed the US.

[00:08:51] Richard Hallett: We had expected this company to continue to grow strongly benefiting from the continued increase in people using online auction sites, but also its ability to cross sell new products and services into its customer base.

[00:09:04] Richard Hallett: However, in reality the business has proved much more cyclical than we’d expected and this has really affected our view both on the quality of the company but also on management guidance and as a result we’ve sold our position.

[00:09:16] Nick Peters: And final question looking ahead How do you see markets behaving to the end of the year?

[00:09:21] Richard Hallett: Well, one of the key points to make about this fund is that we do not make investment decisions based on macroeconomic forecasts, and that’s precisely because we believe that they’re just so difficult to get right on any consistent basis.

[00:09:34] Richard Hallett: Instead, what we do is we look for companies which we believe have the ability to grow regardless of the wider economic backdrop.

[00:09:41] Richard Hallett: And typically we take a two to five year view on our individual companies prospects rather than any shorter term view on markets. That said, we do keep a very close eye on the wider picture, and I’m really positive on the outlook. We think that the medicine of tighter monetary policy in response to higher inflation is finally beginning to work.

[00:10:02] Richard Hallett: We’re seeing lower inflation in North America, moderating trends in Europe, and we expect the UK will follow shortly. In addition, we hear on the ground level from our company management teams that food inflation is abating and the logistics and energy costs are falling together with commodity prices.

[00:10:19] Richard Hallett: While wage inflation is still an issue, of course, particularly in the UK, we believe this should level off in the next six months. So we believe that as markets finally begin to see interest rates peak and perhaps even begin to fall over the next six months, 12 to 18 months, then risk appetite will begin to improve.

[00:10:38] Richard Hallett: We expect this rising confidence to be led from the US and indeed Europe, but will ripple across to the UK where we see sentiment and valuations at multi-decade lows.

[00:10:48] Richard Hallett: In the meantime, we believe that at current levels, quality UK companies really do represent an exceptional longer term opportunity.

[00:10:58] Nick Peters: Well, thank you very much for your insights Richard, very interesting as always.

[00:11:02] Richard Hallett: Absolute pleasure as always, Nick.

[00:11:05] Nick Peters: Thank you, and thank you listeners for joining us and if you’d like to hear more about Marlborough’s Multi-Cap Growth Fund, then please visit our website or contact your Marlborough sales contact.

[00:11:15] Nick Peters: Thanks very much. Goodbye.

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Glossary

Bond Yields: Bond yields refer to the annualised return earned by an investor on a bond, expressed as a percentage of the bond’s face value. It represents the interest income generated by the bond and can be influenced by factors like interest rates and the bond’s price.

Coupon: A coupon is the fixed annual interest payment that a bond issuer promises to pay to the bondholder. It is typically a percentage of the bond’s face value and is paid periodically, often semi-annually or annually.

High Conviction Portfolio: A high conviction portfolio is an investment portfolio that contains a relatively small number of carefully selected securities in which the investor has strong confidence. It typically reflects the investor’s belief in the potential for significant returns from these chosen investments.

Macroeconomic Forecasts: Macroeconomic forecasts are predictions of the overall economic conditions of a country or region. They include projections for key economic indicators such as GDP growth, inflation rates, unemployment rates, and other factors that can impact the broader economy.

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Risk Warnings
Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds. Our funds invest for the long-term and may not be appropriate for investors who plan to take money out within five years. The Fund will be exposed to stock markets and market conditions can change rapidly. Prices can move irrationally and be affected unpredictably by diverse factors, including political and economic events. The Fund will be exposed to smaller companies which are typically riskier than larger, more established companies. Difficulty in trading may arise, resulting in a negative impact on your investment. Shares in smaller companies may be harder to sell at a desired price and/or in a timely manner, especially in difficult market conditions. The Fund invests mainly in the UK therefore investments will be vulnerable to sentiment in that market which may strongly affect the value of the fund. In certain market conditions some assets may be less predictable than usual. This may make it harder to sell at a desired price and/or in a timely manner.

Regulatory Information

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