UK Multi-Cap Growth – Q&A July 2017

Q&A Marlborough UK Multi-Cap Growth: positioned for a strengthening global economy

The Marlborough UK Multi-Cap Growth fund invests in a portfolio of leading companies from across the market cap spectrum that can demonstrate a sustainable competitive advantage. Here the fund’s manager, Richard Hallett, talks about reaping the benefits of strengthening global growth, identifying long-term ‘secular’ growth trends and how he selects stocks for the fund.

How does the economic picture look from a global perspective and for the UK specifically?

“There’s a lot of noise around Donald Trump’s presidency, elections in Europe and other concerns, but look at the data and there are signs that global growth is strengthening, with the OECD and IMF both raising their forecasts for economic growth around the world.

“In the US, the Fed is raising interest rates, which indicates it believes growth, currently around 2%, should be relatively resilient; small business confidence is also strong; and unemployment is down. The situation in Europe seems significantly better than was anticipated a year ago, with growth improving and some of the political risk alleviated.

Meanwhile in China, concerns about debt and the property market have eased and GDP growth looks pretty healthy at around the 7% mark. So the picture from all of those major regions around the world looks encouraging.

“However when you look specifically at the UK, the risks look higher. There’s the prospect of rising inflation caused by weaker sterling and that could erode consumer confidence, which may take a further hit if the property market falters. We also think that protracted Brexit negotiations could impede business investment.

“So we think the risks facing the UK have increased, while we’re more bullish on the prospects for global growth than we have been previously.”

Based on that view, how is the fund positioned?

“We’re positioned to benefit from that stronger global growth. We began reducing exposure to domestically focused businesses in the first half of last year and accelerated the process after the Brexit vote, moving to more global businesses, which will benefit from improving growth around the world and also from the weakness of sterling.

“As we stand now, around 80% of the underlying earnings of the companies in our portfolio come from overseas markets. We do still hold some UK-focused businesses, but they’re very resilient companies that have proved themselves through the economic cycle in the past.”

Can you give some examples of ‘global growth’ stocks you hold?

“We like Prudential, which is a global player in financial services. It’s achieving particularly strong growth in Asia, where it’s benefiting from the rise of the middle class and their increasing appetite for savings and insurance products.

“A little further down the market cap spectrum, we hold Renishaw, which is a world-class global metrology business that makes precision measurement equipment that’s sold into the industrial and healthcare sectors. Only around 5% of its earnings come from the UK.

“Other businesses with a strong global focus that we like are BBA Aviation, which is an aviation support services group with a strong presence in the US and Europe; Dechra, the veterinary pharmaceuticals business, which is increasingly becoming a global player; and Homeserve, the home emergency insurance and repair company, which is expanding rapidly in Europe and the US.

“We’ve sold Domino’s Pizza, which has done very well for us for a number of years, but the competitive risks from delivery services such as Deliveroo and Just Eat are growing and it’s a company that’s pretty much wholly reliant on UK earnings.”

How would you summarise your investment strategy?

“We’re looking for companies that can deliver sustainable earnings growth throughout the economic cycle.

“One way we do this is to identify secular growth stocks – businesses whose positive trajectory is supported by a long-term growth trend. These themes include technological change, outsourcing, growth of the Asian consumer and rising healthcare spending. I’d categorise around 75% of the companies in our portfolio as secular growth stocks benefiting from trends like these.

“We like companies that are leaders in their chosen field, so we also want to see a sustainable competitive advantage, whether that’s having the most effective technology, first-class management, exceptional distribution or very strong branding. In many cases it’ll be a combination of factors. We also like to see them protecting themselves from competitors by investing in barriers to entry.

“It’s a pretty strict filtering process, which narrows the market down very markedly, hence we hold a fairly focused portfolio of between 45-65 stocks.”

What is the breakdown of the portfolio by company size?

“We have the freedom to invest in companies of all sizes if they satisfy our rather rigorous criteria. Currently, around 35% of the portfolio is in FTSE 100 stocks and 12% is in small caps, which for our purposes are those with a market cap below £1 billion.

“Just over half the portfolio is in mid-cap companies, but not all of these are listed on the FTSE 250. About 15% of our mid-cap exposure is in stocks listed on AIM, but with a market cap above £1 billion – companies like Abcam, Fevertree, Boohoo.com and ASOS.

“In recent years the percentage we have in AIM has gone up, largely because there are some very interesting companies on the junior market. One relatively recent addition to the portfolio is online estate agency Purplebricks, which is revolutionising the way we sell houses. That’s another AIM stock with a market cap that’s over £1 billion.”

Are you more bullish than you were a year ago or less?

“I’m more bullish on the prospects for global growth than I was a year ago and that’s largely to do with the economic recovery in Europe.

“There are reasons for caution, of course. No-one really knows what the eventual consequences will be of all the extra money created by quantitative easing and there’s also little evidence of action to tackle the very high levels of debt in many Western nations.

“On a more positive note though, we’re seeing growth continue to pick up at the same time as central bankers are talking about tapering stimulus measures. So you could say that for the first time since the financial crisis what we’re seeing is real growth and I think that’s encouraging.”

*Morningstar data to 08/07/17. Bid-bid, net income reinvested.

Regulatory Information and Risk Warning

The past is not necessarily a guide to future performance. The value of investments and the income from them may fall as well as rise and you may not get back the amount you originally invested. The Fund invests in smaller companies which carry a higher degree of risk than larger companies. The Fund invests mainly in the UK. Therefore it may be more vulnerable to market sentiment in that country. You are required to read the Key Investor Information Document (KIID) before making an investment. The KIID and prospectus for all funds are available free of charge at marlboroughfunds.com or by calling 0808 145 2500. This document is provided for information purposes only and should not be interpreted as investment advice. This material is a communication to professional advisers only and should not be disclosed by such advisers to their customers or other non-professional individuals without first contacting Marlborough for permission to communicate this material. The information contained herein has been prepared from sources believed reliable but is not guaranteed and is not a complete summary or statement of all available data, nor is it considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situations or need of individual investors. Please note that for your protection telephone calls may be recorded. This document may contain FTSE data. Source: FTSE International Limited (“FTSE”) FTSE 2017. “FTSE” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent. All information unless otherwise stated is as at 08.07.2017.