Marlborough's Sid Chand Lall: why UK smaller companies have done so well, July 2018

Marlborough Multi Cap Income, which is on the Chelsea Selection, is a small and mid-cap-focused fund which ventures into areas of the stock market where many other income funds fear to tread. It is highly-diversified – holding at least 100 stocks at any one time – and aims to combine fast dividend growth with some capital appreciation.

We caught up with its manager, Siddarth (Sid) Chand Lall, and discussed the outperformance of UK small-caps, what has influenced his investment style, and the most helpful piece of investment advice he's been given.

UK smaller companies have comfortably outperformed medium-sized and larger UK companies since the EU referendum. A lot of investors might be surprised by this because they are typically more dependent on the domestic economy. Why has this happened?

“The outperformance of UK small-caps since the Brexit vote demonstrates the diversity of the companies operating at this end of the market. There’s a stereotype about small caps being dependent on the domestic economy. In reality though, many have an international focus and have been benefiting from stronger global growth or tapping into new and fast-growing markets, so they are performing well despite the shadow Brexit uncertainty is casting over the UK economy.

“A good example is hotel company PPHE, which operates the Park Plaza chain. Some might take the view that it’s a consumer-facing business, with a lot of hotels in the UK, and so is reliant on the domestic economy, and, indeed, it was hit after the referendum vote. It's share price has rebounded strongly though, doubling over the past two years to £13.90 at this point in time.

“Many of its UK hotels are trophy assets in London, so it benefited when the weaker sterling increased the number of visiting tourists. It also has a growing portfolio of hotels in continental Europe.

“Another example is Midwich, which distributes audio-visual equipment in the UK, Germany and France. It combines technical expertise with strong long-term customer relationships and represents a number of high-end brands, including Harman Kardon, which provides audio equipment for car manufacturers including Mercedes-Benz. It has achieved strong growth in profits and the share price has risen from £2.45 at the time of the referendum to more than £6 now.”

Who are your biggest investment influences and how has this shaped your process?

“There are a number of investors for whom I have a great deal of respect, but the reality of being an income manager, with the focus on dividends that this entails, imposes its own unique discipline and perhaps means the influence of others is less significant.

“What’s at the forefront of my mind in my day-to-day decision is making sure that we stay true to our investment process and that, as a UK equity income fund, we continue to meet the Investment Association’s requirement that our yield is higher than that of the FTSE All-Share. That hurdle is not something to be taken lightly, and we’ve seen some high-profile funds removed from the sector because they didn’t manage it, so I’m very proud of our achievement.

“We have a strong track record on long-term capital growth, but not at the expense of the dividend. We never forget that first and foremost we’re an equity income fund.

“It’s important too, not to underestimate the value of behavioural finance, which is the science of understanding how emotions and psychology can influence investment decisions. As investors we all have our behavioural biases and it’s important to understand them and recognise when they might lead us to make a poor choice. Recognising our behavioural traits, and learning from our past mistakes, helps us to make better decisions on behalf of our investors and doing the best possible job for them is, after all, what managing a fund is all about.” 

If there is more to your process than being guided by one influence, have you been given a particularly poignant piece of investment advice which has stuck with you over the years?

“More than a decade ago, I attended a presentation by Henry Kravis, the co-founder of private equity firm KKR, where he stressed the importance of spending a long time studying your mistakes. That’s stayed with me and has been a very useful piece of advice.

“There’s always a great deal of focus on people’s successes, but to me it’s just as important to understand our mistakes and avoid compounding our errors. So, when companies go wrong for us I study what happened in great detail and learn from it.

“For example, when a company runs into trouble, a difficult decision has to made. Is this a genuine one-off, with a perfectly reasonable explanation, or is it the start of a trend, where one profit warning will be followed by a second and a third? Studying past mistakes has shown me problems tend to occur when you’re too generous in giving a business the benefit of the doubt – perhaps because you know the business and the team running it well. Recognising that helps to avoid behavioural mistakes in the future.” 

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Sid's views are his own and do not constitute financial advice.

Published on 04/07/2018