Latest webinar: Unlocking UK and European opportunities in 2024

David manages Marlborough European Special Situations, which was recently named Best European Small and Mid-Cap Fund over 10 Years in the 2024 LSEG Lipper Fund Awards.

Richard manages Marlborough Multi-Cap Growth and leads our UK and European equity funds team. He was shortlisted for Best Alpha Manager – UK Equities in the FE fundinfo 2024 Alpha Manager of the Year Awards.

You can watch a video (below) of the webinar, which was hosted by Marlborough’s Nick Peters.

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Meet the speakers

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Transcript

[00:00:00] Nick Peters: Good morning, everybody. Thanks for taking the time to join us today, as we talk about the exciting opportunities in the UK and European equity markets, my name is Nick Peters, and I'm the Investment Adviser at Marlborough, and we'll be hearing today from two excellent fund managers, both FE Fundinfo alpha rated managers.

[00:00:32] Nick Peters: So firstly, Richard Hallett, so he's the one with the amazing backdrop, which is, which is not fixed. It is his actual backdrop. He leads the UK equities team and manages the Marlborough Multi-Cap Growth Fund and invests in what he describes as exceptional companies, across the market cap scale, including a sizable allocation to small caps. And those exceptional companies will have a sustainable competitive advantage and growth underpinned by at least one long term structural growth trend. The proven process has achieved outstanding long term performance track record. The fund's top decile in the IA, UK All Companies sector since he took over in August 2005.

[00:01:21] Nick Peters: The return he's achieved since taking the helm is more than 440% strongly outperforming the FSTE All-Share, which are just under 240% and more than double the IA sector average return of 210%. Richard was on the short list for the best Alpha Manager, UK equities in FE 2024. Alpha Manager of the Year Awards, which were announced earlier this week.

[00:01:51] Nick Peters: And his colleague, David, David Walton, manages Marlborough European Special Sits, which, while free to invest in companies of all sizes, favours small caps. And that's because this is where David and his team believe the most attractive opportunities to be found. And we'll talk about that later. The team seek out undervalued, well-managed companies with market beating growth potential.

[00:02:16] Nick Peters: And they aim to invest over the long term. And again, the performance has been excellent over the long term. Top decile over five and 10 years. And a top performer in the Europe, ex UK, IA sector since David was appointed manager in October 2013. And the fund was named Best European Small and Mid-cap Fund over 10 years in the 2024 LSE Group Lipper Fund Awards.

[00:02:46] Nick Peters: Morning, gents.

[00:02:48] David Walton: Morning, Nick.

[00:02:48] Nick Peters: Okay, so for those that have dialled in, again, thank you very much indeed. We've prepared some slides to support thoughts on areas such as the macro environment, valuations, smaller companies, as I mentioned, and M&A and we'll also talk about some of the holdings in the funds and then move to Q&A.

[00:03:14] Nick Peters: And then please send in questions as and when, and I'll try and ask them in real time or, we'll leave them to the end of the webinar.

[00:03:26] Nick Peters: Okay. So, the Marlborough team have been saying for a while that the European markets, so both Continental Europe and UK look very good value. Yet the performance of the markets has been relatively poor coming into this year. We've needed momentum really to turn in terms of the drive for the markets. It feels actually over the last couple of months that those, those headwinds that we've been facing, are beginning to turn and the tide is turning. So we'll, we'll look at what has been capturing investors' attention and as I say, talk to Richard and David about stocks, and talk about those headwinds that have now, we think become tailwinds.

[00:04:10] Nick Peters: So firstly, the, the economic picture. So, this chart here shows the purchasing managers index, it's a diffusion index. So, numbers over 50 suggest that the manufacturing activity is beginning to pick up, and as you can see across different countries, UK, France, Germany, Italy, all beginning to turn more positive.

[00:04:37] Nick Peters: However, so if you look at 2023. It was a similar picture, but spring optimism turned into autumn pessimism. So, Richard, we'll start with you. What do you think? What's different this year?

[00:04:53] Richard Hallett: All right, thanks Nick. Well, yeah, if you look at this chart, I mean, it does look a bit of a sort of a roller coaster ride.

[00:05:00] Richard Hallett: But if we just sort of cast our minds back a year. Let's say it's the beginning of 23, when at the tail end of 22, activity levels started to pick up a bit on the basis of the thinking that inflation had peaked because oil prices and energy prices were falling quite considerably, business confidence took a huge hit because of the failure of a few US. regional banks. And if you remember, Credit Suisse also went under, I think, in March 23. So, there's a lot of confidence issues resulting from that financial fragility in the system. Central banks were not able to reduce interest rates because inflation has proved to be pretty sticky, particularly in the services sector.

[00:05:56] Richard Hallett: I think more recently, the optimism that we're seeing has come about because of the interest rates. I think markets feel that they've peaked really around September and October last year. They've yet to fall back, but what we're seeing is whilst inflation data is still quite volatile under beneath that, we're seeing continued falls in energy prices, which is great for Europe and in the UK, where, you know, we rely on third-party providers of energy.

[00:06:33] Richard Hallett: We're seeing reduced levels of food inflation, and also, we're seeing, sort of more of a stabilisation in terms of wage increases and retail, consumer, appetite, activity. And so, what we're seeing is a slowing in the economic environment, which is perversely actually seen as good news because, business leaders can look forward to perhaps lower interest rates going forward and a lower cost of capital in their businesses.

[00:07:12] Nick Peters: Right. So it's been interesting to see also housing markets, construction appear to be picking up and in, in your fund, I think you've got exposure to, to that particular theme across a number of stocks you've chosen to highlight Ashtead as one of the holdings. Could you just talk us through that, that stock, please?

[00:07:31] Richard Hallett: Of course, I mean, we like to have stocks, which are sort of leaders in their markets, which have got good sort of underlying structural growth trends or global in their outlook and can benefit from many years of full compounded earnings growth. We've got a variety of stocks, which benefit from a pickup in construction activity. Ashtead group is a is a good example. We've owned it for many, many years, it's a leader in the US market in particular in terms of provision of non-residential construction equipment, and the provision of rental equipment and it really does benefit from the sort of scaled benefits that come from being one of the largest operators in its in its field leading to sort of better sales densities giving better service provision to customers and it's just generally taking market share and, it's really benefiting from sort of a long term structural growth trend, which is the increasing appetite of business providers to use rental equipment as opposed to buying it themselves because the cost of capital is higher but also, they don't have to provide all the costs that go with owning equipment in terms of repair and maintenance and just gives them a better operational flexibility. So rental sector is continually growing. And Ashtead is benefiting from that trend and compounding that growth by consolidating the market from its excellent sort of cash flows. and we think these trends are just likely to continue for many years. So, it's a holding which we continue to be very excited about.

[00:09:27] Nick Peters: Okay. Thank you. You, you mentioned the consumer and it's, it's clear in the UK that the consumer has gone through a pretty tough period as you can see here from 2016, but, but interestingly, mid 2023, we've seen a pickup. In consumer confidence.  you know, the title here. So, rebounding is perhaps consumers get used to higher rates.  David, you, you meet a lot of companies as part of your investment process. What are the companies saying about the picture in in Europe regarding the consumer?

[00:10:09] David Walton: We're seeing companies who are reporting, let's say, gradual improvements in consumer confidence from a lowish level, really, I think because, just going back a bit, your chart there, I mean, we had a post COVID boom in 2021 in consumer spending and we've been paying the bill for that ever since, to be frank. So that's what's happened. I think only now are we kind of coming out of that paying the bill phase, yeah, in terms of higher inflation, higher interest rates, taxes going up, etc. in some countries. So now we are beginning to see consumers even ordering more new kitchens for that apartment or their house.

[00:10:58] David Walton: In Denmark, for example, one of our holdings is active there, equally in terms of the, the media sector, there is a bit more growth now in advertising and also market research spending on the back of companies anticipating being able to launch new consumer products because the Consumer environments is slightly improving.

[00:11:33] David Walton: So, there's a kind of ripple effect really across a number of sectors from increased consumer confidence. And I'd say, we're at a sort of early stage in that currently.

[00:11:40] Nick Peters: Okay. And one of the stocks in your portfolio, Serantis, obviously the share price suggests that it's, it's benefiting from that view about the consumer. Can you just talk us through the stock, please?

[00:11:53] David Walton: Yes, that one is doing well, partly because the consumer environment remains quite good in its markets and is improving indeed. So, this company is selling household goods in Greece and Southeast Europe, so cosmetics, health and beauty products. garbage bags, sandwich bags, aluminium foil, really basic products which are used by households on a day-to-day basis, and it's partly done well because of the improvement in consumer confidence. It also illustrates our process in terms of the company is still quite obscure. Partly because it's based in Greece, which certainly for some UK investors has negative connotations. And it's part of our process really to get to know lesser-known obscure companies where they have good growth prospects, which are not reflected in the share price valuation, which was certainly the case for Serantis. It was clearly undervalued

[00:13:05] David Walton: We've held the stock for a number of years, but more than five years. And over that time, the company's expanded by acquisition and recently has issued a strategy update really to inform the wider market about its prospects. And that's partly why the share price has, has had this rise in the last six months.

[00:13:30] Nick Peters: And you mentioned you're happy to look at more obscure areas… I'm just wondering how this stock came on the radar in the in the first place.

[00:13:40] David Walton: It's really because we try to have an open-minded approach to looking for new holdings for the fund and even perhaps be at times little contrarian. So, as I mentioned, Greece have negative connotations for some UK investors to do with the sovereign debt crisis. But [the fund] doesn't necessarily hold that because a company has, let's say a bad government doesn't mean that the actual companies within that country are also bad. So, Sarantis is actually a very good company and has prospered during very difficult times in Greece. So, we think actually it's a good opportunity, which, yeah, if you just dig down a little deeper, you can discover.

[00:14:32] Nick Peters: Okay. Thank you very much so, I mentioned earlier about valuations and  how they look attractive both for continental Europe and, UK and we've got a couple of slides here that bring that out.

[00:14:49] Nick Peters: I think we're all pretty well aware of how expensive the US Market has become, and we've seen a number of research pieces at Marlborough. We've seen a number of research pieces written by allocators as they consider how to position their funds over the coming say, 5 to 10 years, and we've shown the charts here for just using the price to book ratio book.

[00:15:13] Nick Peters: It's a very similar picture if we'd use PE or price to cash flow. So, on the left-hand side, you've got S&P 500 returns, each dark dot is a data point for one month and the data goes back to 1990. So, you've got the price to book at a particular point in time, and then on the Y axis, the annualised returns for the following 10 years.

[00:15:39] Nick Peters: And the green dot that you can see, shows that currently the price to book ratio for the US market is somewhere between four and a half and five times, and historically when the market is valued at that sort of level, the annualised returns for the following 10 years are negative for the S&P500.  

[00:15:59] Nick Peters: Whereas on the right-hand side, we've got the same picture for the FTSE 100, traditionally price to book ratios are lower because of the constituents of the FTSE 100. So, price to book is currently around two times forecast annualised returns for the following 10 years are positive when the market is trading at this sort of price to book ratio.  

[00:16:29] Nick Peters: So, as I say, we could have used different ratios and it's a very similar picture for, for continental Europe and then the next slide, a slightly tongue in cheek title, I have to admit, but what this chart shows is that for every UK sector, compared to the US sector, is looking cheap.

[00:16:58] Nick Peters: So, what we've shown is that, if you look at the first example, consumer discretionary, where the data goes back to the year 2000, you can see the range of relative valuations, UK versus US, and right now the sector is trading towards the bottom end of the second quartile. So, then if you read across, you can literally see for every single sector that UK stocks are trading cheaper than they have in their history compared to the US.

[00:17:34] Nick Peters: So, many of us think that's probably the case for tech, but actually, as you can see from this chart, it's across all sectors. Richard, if I can come to you turning the funds, you're happy to invest in international stocks. So firstly, maybe just explain to listeners, why you do that in a UK equity fund.

[00:18:01] Richard Hallett: Sure, I think the first thing to say is, look, the Multi-Cap Growth Fund is a UK fund and it would always be investing predominantly, for most in UK listed stocks. I mean, the UK stock market is very deep market, it's got a large range of, really world class exceptional growth stocks to choose between. But the reason why we sometimes have a few international names in there is, the fact that our investment process is indeed global, it has to be global. Whenever we're analysing structural growth trends, looking at the competitive environment across sectors that we are interested in, just looking at that competitive mode, then from time to time we will come across international companies which are just better placed to exploit that opportunity than perhaps a UK name.

[00:19:10] Richard Hallett: And when it really is quite an exciting opportunity, a best of breed type business, and indeed it fits in within the portfolio, then we’ll maybe sort of find a space to slot it in. We've got about 12 percent of the fund in international names at the moment, and we've been reducing it more recently.

[00:19:33] Richard Hallett: An example is a company called Novo Nordisk, which actually David, I think owns as well. It’s a global leader in the provision of diabetes and obesity drugs and it's just had incredible trading updates over the last few years, boosted by great demand curves in its markets, but also, great updates in terms of the new opportunities that it's drugs can move into, whether it being lowering risk of heart attacks and strokes, which are all, these are all new markets, which we think will compound the level of demand in its sectors and really add to the exciting growth prospects that it's got ahead of it, that's really where we come from.

[00:20:35] Nick Peters: David, so Richard mentioned Novo Nordisk. So, you do have some mega caps in your portfolio, what's their role?

[00:20:45] David Walton: It's really because they also provide growth potential for the fund and also being large caps, they have a greater liquidity and trading volume compared to small companies. So, it's about also diversifying the fund somewhat, so the fund isn't entirely invested in small companies. So partly risk management, and also partly because these large companies have fairly unique growth opportunities, which you can't always find in small companies, such as Novo Nordisk.

[00:21:19] Nick Peters: Have you been top slicing the position as well?

[00:21:22] David Walton:  That's one which certainly it was a larger weighting, in the past for the funds and part of our process is that if the valuation gets particularly high, then we did sometimes reduce the holding, but we still like the prospects of the company. Yeah, it's, it's updates have remained positive.

[00:21:46] Nick Peters: Okay, thank you. Just to remind participants that you can send in questions we've had a couple already but please send them in I'll ask them either as I say real time or leave them to the to the end of the webinar.

[00:22:08] Nick Peters: So, we've mentioned small cap a couple of times, this is obviously a favourite slide of those of us that Marlborough and just shows how over the long term, smaller companies have performed against large cap, David, do you just want to give us a flavour of why that is? Why is the long-term performance so much stronger?

[00:22:30] David Walton: Well, like I think there's been a number of academics who have studied the so-called small cap effect. So, I wouldn't want to pretend to know more than they do. I think the point is that small companies are less well known than large companies, almost by definition. So that means that when a small company begins to prosper and do particularly well, then as well as having a profit expansion, quite often it's stock market valuation also expands in terms of the multiple, the PE ratio will also expand as more investors buy into the company. So, I think that's certainly what we look for in our investment process as well as is to identify those companies which do have the above average growth potential, but where the market valuation does not reflect that because they are simply small and obscure.

[00:23:32] Nick Peters: And there's plenty of commentary that actually a lower interest rate environment should help smaller companies. Could you just expand on that, please?

[00:23:43] David Walton: Yes, I think it's really because small companies tend to be less sophisticated in their financing arrangements than large companies. They are more exposed to short-term interest rates. They're less able to issue corporate bonds with long terms, fixed coupons, et cetera. So, that obviously is a weakness in small companies, which was evident when they underperformed in 2022 and 2023. But equally, when interest rates stabilise, as they seem to have done now, and if they fall in Europe, let's wait and see, then it would be, I think, more of a tailwind for small companies than large companies.

[00:24:31] Nick Peters: Thank you. Richard, You mentioned earlier that you've reduced your international exposure down to 12 percent in the fund, and increased exposure to UK and UK smaller companies. Do you just want to expand on that point? And we've also got a slide here, on one of your favourites small cap stocks?

[00:24:54] Richard Hallett: Yeah, sure. Yes, I mean, why have I done that? Well, it's not because I don't think these international names can't continue to perform, I think they will do, but the fact is, they've generally like with Novo Nordisk, they've traded incredibly well through a very difficult period over the last few years and the stock market has boosted the share prices and the valuations of these sorts of names that we own.  And what's increasingly evident is the discount anomaly that's afforded between these international growth stocks and what we're seeing in the UK in the small mid cap sectors where, which have just been unloved and continually de rated versus these international comparisons. So, it's like an old chart really.

[00:25:51] Richard Hallett: Not that I think these international names are any way less good, I think they will continue to perform, frankly, but I just see more of an opportunity available in some of these small mid cap names. And a good example is Trust Pilot which IPO’d back in 21 with great fanfare and did incredibly well for a short period. But as you can see, [it] fell substantially through 22…well, why is that? Well, I mean, it is a growth company at IPO and through 22, it was highly valued and actually loss making, and what's happened is that during that particular period is that with the change in interest rate environment,  the source of more richly valued stocks, particularly on, unprofitable stocks where you've got to look into the future for cash flows and profits.

[00:26:52] Richard Hallett: You could say they're a bit more speculative [and] because of that, fell out of favour quite dramatically. Now, why we think the opportunity is here now is that we've seen Trustpilot operate through this quite difficult trading environment, and they've actually operationally proved themselves to be quite strong. They're now cashflow positive, they're now profitable. They've been growing their turnover and revenue at near enough 20 percent over the last couple of years. The last couple of trading updates have been really positive. They've changed the management team with a really high-profile board that we know of and supportive of. And we look forward to a better monetary environment as well where we might see a lower interest rates in due course. So, you know, it's a, you might have heard of it, it's a sort of leading global customer review platform that's pretty much no other similar model available out there competing in its space. It's got a huge sort of addressable market. It's got a very low penetration and it's there in its markets, some single digit level, particularly a great expansion opportunity in the US, so we think it's a kind of business which can outperform and do very well when we look forward.

[00:28:26] Nick Peters: Okay, thank you. We've had a question here from someone who obviously knows Marlborough reasonably well. They've asked if this stock is also held across the small cap UK small cap funds? And how do you work with the rest of the team in covering smaller companies?

[00:28:48] Richard Hallett: Oh, right. Well, the answer to that is yes, it is owed any other smaller company funds. And secondly, we work together incredibly closely. We are a very close-knit team, I'm glad to say we've all worked very closely together, all the, all the fund managers, David included, the last 10 years plus. So, we know each other's strengths and weaknesses, and huge sort of mutual respect, I hope, in each other's, abilities, and great read across from other, each other's views on the world. And so, yeah, we all sit in each other's meetings and tap into each other's knowledge and this stock is a great example of that.

[00:29:36] Nick Peters: Thank you, and for those that know more or less well, so there are three funds that invest in UK small caps, Special Situations, Micro-Cap, and Nano-Cap. And as the name suggests, that's a sort of descending order of market capitalisation and we also have a Multi Cap Income Fund where there's a bias towards smaller companies as well.

[00:30:01] Nick Peters: So, moving on, M&A has been a strong theme of late and I was doing my homework and 59 companies in 2023 were acquired in the, quoted companies were acquired in the UK, and of those 50 had a market cap of less than £500 million.

[00:30:30] Nick Peters: So, bid activity seems to be pretty strong in smaller companies. David, is that due to the valuations do you think, or are there still players out there with plenty of cash to deploy?

[00:30:44] David Walton: I think it's partly due to the valuation levels that small companies reached in 2022 and 2023, which were quite low, and particularly the lower down the market cap range you went within the small cap universe, then more often you saw bids. And the European fund itself, received bids for five holdings, which was towards the high end of the range over the last years, really. So, yeah, I think it's primarily due to low valuation levels and perhaps also a perception by the bidder that the news couldn't get any worse. So, unfortunately, obviously there's also a war in Europe. So, we had that, that was added to the list of woes from the point of view of, of the market, as well as high interest rates, inflation, energy costs, et cetera, et cetera. So, all these things were very negative. At some point you think, well, actually, can it get any worse? And I think that's what happened with these takeover offers. The bidders thought, well, can't get any worse. The shares are pretty cheap. Let's, let's make these bids. And then we have got some good, good bargains for some of these buyers.

[00:32:02] Nick Peters: We'll come to a stock example in a second, but I imagine as a fund manager, it's frustrating, isn't it? If, if they're sort of valued cheaply, and then you get a bid coming in to take a stock out before it sort of realised its potential.

[00:32:16] David Walton: Yes and no, I think we obviously, we also have, we accepted that it's part of the market. Really that there will be takeover bids. And of course, for this fund, we've got a very large universe of roughly 4,000 companies to look at. So, whilst we might lose one company to a takeover bid, there are many other companies which we can look at to replace that holding. So, and I think the, the fun long-term performance shows that we've not really suffered from a lack of opportunities.

[00:32:47] Nick Peters: And do you want to talk about Self Store, which is one of those that was bid for?

[00:32:52] David Walton: Sure, and that was a good example of our process, in terms of we held the company for a number of years, and obviously as you can see from the share price graph, it had, peaks and troughs over that time, being a property company, it's sensitive to the interest rate level. So, when the rates began to go up, share price went down, but the company prospects remained good, and that's why we held the share. It wasn't in any financial distress at all, it was simply that the valuation level went down, and then an American group then came through with actually a fairly attractive takeover offer, which is a good way to crystallise value in the company. So, we accepted that. And then, yeah, we've obviously been able to, we haven't, we haven't invested in other property groups since then, but we've been able to invest in other sectors within this small company universe.

[00:33:49] Nick Peters: Okay, thank you. One other thought comes to mind. When a stock is bid for, do you tend to sell on the bid, or will you hold on until and actually receive the cash once the deal closes?

[00:34:04] David Walton: I think that's a sort of technical question which has to be determined on a case-by-case basis. I think historically what we've done is we've accepted the offer and then we've received the cash from the bidder, but I think it's on a case-by-case basis.

[00:34:23] Nick Peters: Okay.  before we go into the Q&A and we say we've had a few questions I just want to dig a bit deeper into the investment process that you both following in terms in terms of meetings with company management and senior management, and there is some scepticism around the value of meeting management given regulatory requirements such that everyone needs to have the same information at the same time. David turning to you first, what, why even acknowledging that fact? Why do you think it's still useful to meet management on a regular basis?

[00:35:01] David Walton: It's really to improve our understanding of a company's business model and its market and growth opportunities. So we're not trying to second guess the, the next quarterly results direction or that sort of thing. So, our process really is about owning a company for a fairly long period of time in stock market terms, so five years plus. We're more waiting for buying opportunities that might arise from a quarterly earnings miss, for example. And if we are confident that the company's long-term prospects remain good, then we can take advantage of those quarterly setbacks, which always occur from time to time in share prices.

[00:35:52] Nick Peters: And Richard, anything to add?

[00:35:55] Richard Hallett: I agree with what David was saying, but I'll just add that, these management teams we’re very privileged to spend time with on a regular basis on a daily basis you know, they're experts in their fields and sometimes in in other fields as well we know them from previous companies they've been involved in so I think an additional benefit is in the sort of widening the discussion, into the sort of see what's going on in the sectors they're operating in, quizzing them about the competitive environment and then maybe read across is there to other companies that we own in the portfolios in colleagues’ portfolios, and just sort of trying to glean a little bit of, I don't know, external perspective on what's going on in the world and in the markets that we don't know ourselves. And so, it’s always very, very useful to have these meetings.

[00:37:00] Nick Peters: Okay. Thank you. And lastly, in terms of portfolio construction, David, do you, I think others have seen the potential with the European market and, and returns from here, here on in, and you've seen flows into the fund. an you give us some insights on how you deployed that cash? Because I think you have a slightly different approach to many investors.

[00:37:26] David Walton: Yeah, I think we, obviously the fund over, its, time has periods of inflows, periods of outflows, and what we tend to do is during periods of inflows, we will increase the number of holdings on, on the fund. So currently we've got, 78 holdings which is up from about 70, I think, [from] last year. And the rationale for increasing number of holdings during a period of inflow is that it's about ensuring the fund remains diversified and that we're not simply using an inflow to buy existing holdings and then driving up the share price, which is really a bad idea for a number of reasons, which I think you will know why so that's what we do and so also it's about sometimes waiting for an opportunity to buy into a smaller company or what to add to a holding because small company share prices, they are quite volatile. And as I mentioned, you can get these quarterly earnings misses from time to time, where for whatever reason, the company disappoints analysts for that quarter report, and often the long-term prospects remain undimmed, and it's a good chance for us to add to the holding. So that's why currently the fund cash level is around 12%, which it sounds high, but I'm happy with that because it's about being patient and waiting for opportunities.

[00:38:58] David Walton: Our aim is to deliver. The best possible long-term returns with this fund and part of that is about buying shares when they are at attractively low levels and being patient to do that and not just acting hastily.

[00:39:17] Nick Peters: Thank you, Richard. You obviously work at the more liquid end of the market. How do you do with cash flows?

[00:39:25] Richard Hallett: Slightly different now to David's perspective. I think the reason for that is, as you mentioned, Nick, is to do with the liquidity. The Multi-Cap Growth Fund is a fairly liquid fund. Rarely dabble in stocks with a market cap of less than 500 million or so. So timing is less of an issue. We can always buy shares and add to stocks which are  think of them respectively low weighting within the portfolio, less of an issue. So, generally speaking, if we've got inflows, then we will go straight in and buy shares, but not always, and I suppose that's another perspective. I would say is that. And we're not experts in timing the market. That's not where we add value. And I don't think that's what investors are looking to gain from us. We are looking to buy good stocks and benefit from the compounding earnings growth over longer periods of time, at least two years, perhaps five, 10 years plus. So, looking through this sort of short-term volatility and not relying on timing, I think is the perspective I would add.

[00:40:52] Nick Peters: Of the other notable aspects of your fund is a sort of it's a very tight list in terms of named names and in the portfolio. A name turnover is very low. Why do you think that's important as part of portfolio construction?

[00:41:11] Richard Hallett: Oh, right. Well,  again, I mean, our investment process is really trying to hone in and focus in on what we consider to be exceptional businesses that are best of breed businesses with a unique sort of competitive edge that is sustainable over the longer term,   operating sectors that have got really good underlying structural growth dynamics and thereby sort of, if you can hold, find these businesses, and own them for a longer period of time, then you can really benefit from quite a sort of powerful effect of a strong earnings growth over many, many years.

[00:41:52] Richard Hallett: And of course, that's not always reflected in share prices in the short term. It's markets always vulnerable to mark what we call market noise, but it's just transient sort of effects of what's going on in the world. But generally, over a longer period of time, share prices reflect what's going on in the business. So, our expertise and our value add is really to look through that short term noise, volatility and focusing on underlying fundamentals of a business and own them for a longer period of time.  And there a lot of market participants out there we see on a daily basis who really are focused on what's going on sort of a quarterly basis in the next earnings report. And that’s not where we think we can add value of value and it's differentiating ourselves from that approach and looking to the longer term and that and our process has proven to work over long periods of time and we've got good track records that show that

[00:42:58] Nick Peters: David I'm pretty confident you you'll agree with all those sentiments.

[00:43:03] David Walton: Yeah, yeah, it's about taking time with holdings and it's often difficult for us to actually. Understand the growth potential of some of the holdings and the fund, even though we meet the management number of times. And for example, one of the funds [a] top 10 holdings now, VBG, a Swedish company which supplies truck components through an acquisition it made some years ago. It is now the number one supplier of air conditioning equipment to US school buses, which are undergoing a large renovation in terms of the fleet post COVID, which is really generating substantial profit growth for that company, which that was not foreseeable. When we actually bought the shares for the funds some years ago.

[00:43:54] Nick Peters: Excellent stuff. Thank you very much.  so we've listed some of the key takeaways that, we’d like, you know, participants to bear in mind and I'll move straight onto the  Q&A, we've had a few questions in, as I said so the first question, what, what do you see as the biggest risk to markets over the next six to 12 months?

[00:44:20] Nick Peters: Richard, you want to go first?

[00:44:25] Richard Hallett: Look the market at the moment is the sentiment is moving,  more upbeat of very sort of low levels, what I see to be multi decade lows, particularly in the UK, small cap, mid cap sectors,  on the basis that the worst has already happened in terms of interest rate rises, in terms of inflation, inflation, if you cast your mind backwards. Double digit 11-12 percent 15 months ago, and it's now down to 2.3 percent in the UK according to yesterday's data. So, it's come down a long, long way [and] it's still sticky in various areas. And, you know the market is anticipating or beginning to anticipate that the interest rate is going to start to reduce at some stage. So, I'd say a risk. is that inflation stays sticky, maybe due to geopolitical events that are, you know, just frankly really hard to foresee, or difficult to predict.  and interest rates don't come down as strongly, or indeed they may even go up. I think it's unlikely, but I think that's the principal risk as far as I see it.

[00:45:49] Nick Peters: And David…

[00:45:50] Richard Hallett: David's got to help you with that.

[00:45:51] David Walton: Yeah, I think I agree with that. Otherwise, we are seeing companies talking about a recovery in demand in the second half of this year across a number of sectors, not just the consumer sector, but also particularly industrial companies are saying the same thing. That might not come through because they were saying the same thing in 2023 and that then got deferred, so let's see.

[00:46:21] Nick Peters: Okay.   Richard, the, obviously the conservatives called the election for the 4th of July.  What do you see is, and we've got the US election in November. What is the impact of elections on, on markets generally?

[00:46:41] Richard Hallett: Well, I mean, as I was just mentioning a very just a few minutes ago, you know, I put it down into that sort of market noise category, really, there's a lot of talk. It fills a lot of columns in the papers, and it's going to occupy a lot of journalists briefing notes, analysts notes over the next month or so, particularly in the UK, but I think from our perspective is that that's something we look through, as I say, longer term over many years. We're not quite, we're not, adding, we're not being paid to add value in terms of looking through political changes and what the ramifications are on, markets and then through the markets into our client companies. e are buying good businesses, which we don't think we have an edge on in terms of understanding and having a view on, and making sure they're strong businesses that are relatively unaffected by the whims or changes or political change, clearly. So, I think that's how I would see it, but trying to see how these elections are going to affect markets, I think it's very difficult to draw a view on.

[00:48:09] Nick Peters: Okay, David, anything to add to that?

[00:48:12] David Walton: Yeah, I think we have always seen Europe as a, a low growth region in terms of economic growth, low productivity growth for the many reasons which I won't elaborate, on this call. So, in other words, we aren't expecting to get any help, particularly from the European economy, you know, for the companies held in the funds. It's about identifying strongly growing companies in often niche markets, where the stock market hasn't recognised their growth potential. That's the key thing for us to do. And that works well in Europe. And it's not about investing based on predicting GDP growth next year, etc, etc.

[00:48:57] Nick Peters: Okay, a question has come in.

[00:48:59] Nick Peters: What has not worked for the funds recently? David, you want to start with that one?

[00:49:05] David Walton: Well, I think the, the fund does have a high weighting in small companies and small companies have not performed as well as large companies in Europe this year. It was the same in the last two years as well, 2022 and 23. So that has been a headwind on fund performance. But it's about having a long-term approach, which has delivered good performance for the fund over the last 10 years. And we are now seeing some improvement in small company share price performance year to date. So that's probably the main thing that hasn't worked for the fund. Apart from that, I think the fund also does invest in some more cyclical companies, which again have been somewhat shunned by investors. In the last two years, because of concern about economic growth, not recovering from the drop it took in 2022, and again, whilst not predicting economic growth rates, at the same time, we also don't believe in a, a sort of permafrost type, endless recession either. So there always, there usually is a recovery after a recession.

[00:50:24] David Walton: So, I think it's again about. being patient with some of these holdings and as long as they have the balance sheets and the market positions to grow in better times, then it is often better to wait for those times rather than to kind of panic out, drawing a low point of expectations.

[00:50:48] Nick Peters: Yeah, Richard?  

[00:50:52] Richard Hallett: I  mean, generally, the last couple of years have been incredibly difficult to manage money through, particularly if you're a growth investor, like I am, I think generally over the last year, I mean the fund we found particularly comforting from the fact that actually companies we've invested in have operationally been very strong and deliver really robust trading updates. And that's generally been recognised over the last year or so, as most of the fund's holdings have started to generate positively, as they show sort of strong operation performance in the face of a difficult economic backdrop. But having said that, where we have not capitalised is being in these large cap businesses that performed incredibly well of late, which are banks, oils, commodity companies, which have really benefited from this higher interest rate environment. As investors gravitate to, some lower value businesses, which are hugely cash generative and paying out large amounts in dividends and can benefit from a higher inflation environment  in the shorter term, we're not in those businesses. They don't really interest us in terms of our investment process. They don't have done. They tend to be more, older style legacy businesses with limited longer-term growth prospects. And so, again, like David, I think yeah, these sorts of businesses have their time in the sun and this we're operating in that environment now.  but it'll be, won't last forever and growth, good quality growth businesses will over the longer term start to outperform quite nicely again. So, I think that's, that's it. largely where we see it.

[00:53:00] Nick Peters: Okay, thank you very much. That's that's it for questions.  David, Richard, any any final thoughts?

[00:53:11] David Walton: I think just from my side, Nick, I think, yeah, I think the Prospects for European small companies remain good, and we are beginning to see some improvements both in the environment as well as their own trading updates. And yeah, I think that, that that's encouraging. So yeah, I think it's from a point of view, I'm reasonably positive whilst maintaining the cash as well. So, you can see I'm patient as well as being optimistic.

[00:53:47] Nick Peters: Yeah, that makes perfect sense. Richard?

[00:53:50] Richard Hallett: I mean, [we] similarly like to take great comfort from the operational updates from Companies that, we have in the portfolio. I mean, one of the largest holdings, Rolls Royce, it reported this morning, had great update. It's really performing in all its metrics and seeing great demand potential in most of its sectors across defence and aerospace.  it's cheap versus international comparators and it's had a good run and we expect that to continue. I think, looking forward, the UK is hugely undervalued across all sorts of international, comparative metrics, and it's really under owned by international and domestic, allocators, and as risk appetite starts to improve, we're already seeing signs of it, it's huge amounts of M&A, as we're seeing on a daily basis at the moment Hargreaves Lansdown was bid for this morning. That's not a stock we own, but it just shows the level of interest in stocks in the UK at the moment for all trade and private buyers who just want to take advantage of the situation. I think, you know, this is a great opportunity, which in a few years' time, we'll look back on and say, you know, it is, definitely, there to show we should be more evolved, really.

[00:55:23] Nick Peters: Thank you. Thanks very much for that. So, I'll draw things to a close now. Thank you both very much for sharing your insights with us today. And thank you participants for your questions. So, we've had some really interesting points from both of them. And I'll just remind you, they both have outstanding track records, delivering strong alpha over the long term.

[00:55:46] Nick Peters: Richard Hallett manages the Marlborough Multi-Cap Growth Fund, and David Walton, Marlborough European Special Situations and as Richard just mentioned and mentioned to me a number of times of late, you know, markets can turn very quickly, and it's well worth participating early rather than missing those turns.

[00:56:12] Nick Peters: Thanks again for joining us and if you'd like to find out more about the funds, obviously contact your Marlborough salesperson or you'll find lots of great information on our website. Thank you and have a good day.

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Risk Warnings

Source: Morningstar / Marlborough. Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. Performance data is calculated on a NAV-NAV basis, net of fees and reinvestment of all dividends and capital gains.

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This material is for distribution to professional advisers only and should not be distributed to or relied upon by any other persons. It’s provided for general information purposes only and is not personal advice to anyone to invest in any portfolio or product. Information taken from trade and other sources is believed to be reliable, although we don’t represent this as accurate or complete and it shouldn’t be relied upon as such. Calls will be recorded for training and monitoring purposes. Issued by Marlborough, authorised and regulated by the Financial Conduct Authority (reference number 115231). Registered office: Marlborough House, 59 Chorley New Road, BL1 4QP. Registered in England No. 01947598.

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