Most persuasive funds list: Marlborough Special Situations

Marlborough Special Situations was the top-performing British fund of the last decade. Its performance compared with its UK Smaller Companies peer group was no less persuasive last year and over the financial crisis.

In fact, it was one of only 15 funds in the IMA sectors which produced top-decile returns and risk-adjusted returns over 2010 and the volatile three years preceding it.

The Fund Strategy website named these portfolios at the end of last year as its “most persuasive funds of 2010”.

Giles Hargreave, the manager of Marlborough Special Situations, is at the hub of the British equities industry, running his stockbroker Hargreave Hale alongside British equity funds.

As a broker, his task is to spot opportunities early, but does not set a premature target price at which he sells a business. His seven-strong team has the resources to analyse a stock and stick with it for long periods if necessary.

Another advantage of Hargreave’s approach is his portfolios are diversified among roughly 200 investments and do not take too much risk on any one of his smaller company holdings. (article continues below)

However, some of Hargreave’s latest holdings across his fund range are riskier than those some other smaller company managers would invest in.

In particular, Hargreave says a lot of the most important secondary share issues are weighted in industrial materials production, where political and operational risks often loom large.

“If unemployment stays reasonably high, it’s tough to imagine there’ll be serious wage inflation”

In his fund range as a whole, Hargreave has invested in Arian Silver Corporation, a silver company with assets in Mexico, Tertiary Minerals, a rare earth producer in Scandinavia and Saudi Arabia, Wasabi Energy, an environmental firm, and Horizonte Minerals, a Brazilian producer.

Hargreaves says the resource sector “won’t go on like it is at the moment”, but he says for now it remains a good trend to follow for stockpickers.

Overall, he describes himself as “light on British economy stocks” and more heavily weighted in exporters to faster-growing regions or companies with operations overseas.

He acknowledges the risk of overheating and inflation, followed by a slowdown in faster-growing areas such as emerging markets. But he says developed world economies should grow faster to close the gap.

“Mild inflation will be good for equities. For really serious inflation you need wage inflation. If unemployment stays reasonably high, it’s tough to imagine there’ll be serious wage inflation. As long as the banks won’t lend, inflation won’t take off,” he says.

“There is certainly an argument that the squeeze on emerging markets and faster growing economies with inflationary pressures may cause a slowdown, but they’re not showing any signs of it.”

Hargreave says finance directors will still use their cash piles towards buying smaller companies and adding to their balance sheets.

He adds small caps will be under no particular pressure to pay dividends, even though investors are increasingly moving into stocks that can increase their payouts in real terms to counteract the effects of inflation.