Multi Cap Income Fund Q&A (March 2017)

Investing across the market cap spectrum for equity income

Siddarth Chand Lall, Manager of the Marlborough Multi Cap Income Fund, assesses the outlook for equity markets and explains how the portfolio is positioned.

How would you assess the outlook for equities?

“UK GDP growth is expected to weaken in 2017. Forecasts vary, but a Financial Times survey of 122 economists predicted a slowdown from 2.1% growth in 2016 to 1.5% this year. A significant factor contributing to that is uncertainty about the implications of Brexit for UK business. It is still too early to judge exactly what kind of deal the UK will be able to negotiate.

“When you consider what else is going on in the world though there is reason to think the UK may actually be relatively well positioned. We’ve had a shock, in the form of the referendum vote, but some of the impact may be priced in to an extent. This is reflected by weaker sterling. Once Article 50 is triggered, it will not be surprising to see a temporary pull- back in the valuations of equities, which have had a strong run recently. This may prove to be a buying opportunity.

“Elsewhere though, and indeed at a global level, there is still plenty of scope for bouts of turbulence. We have Donald Trump now in office but still very much an unknown quantity and the US Federal Reserve expected to raise interest rates. Elections loom in France and Germany and there are other risks in Europe.

“So it’s possible that in 2017 ‘buy British’ will be a mantra that reaps rewards as the market rotates back to favour domestic companies, which are less likely to be affected by any global volatility.”

Overall smaller companies underperformed larger ones in 2016. Do you see that trend continuing?

“I’m more bullish on the prospects for the UK’s smaller companies this year than last. If we’re in a situation where the worst of the shock from the referendum result has been partially priced in, but there is an increase in volatility in global markets, then UK mid and small-caps could perform better. FTSE 100 stocks, which generally have a larger proportion of foreign earnings, may suffer.

“It could also be argued that blue-chip stocks look expensive. In 2016 the FTSE 100 was up 19.1% while the FTSE 250 was up only 6.7%, so mean reversion could suggest mid and small- caps are due a period of outperformance versus large caps.”

How is the fund positioned?

“We haven’t made any major changes to our positioning, because although last year did present challenges, we continue to have confidence in our investment process. We’ve trimmed our exposure to the property sector a little and although we do hold some resources stocks, this remains an area where we’re underweight.

“That’s because resources companies tend to have very high levels of debt – for example, Vedanta – and a number, such as Anglo American and Rio Tinto, have cut their dividends. We do though hold some Royal Dutch Shell and BP, along with copper producer Central Asia Metals, gold miner Pan African Resources and Anglo Pacific Group, which is a royalties business focused primarily on the coal industry.

“In terms of wider opportunities, there are some themes we’re mindful of – for example, investment in housing and infrastructure and government support for challenger banks – and we have holdings that stand to benefit from those.

“We’re stock-pickers first and foremost though, so we’re looking at individual companies, rather than making calls on broader sectors and themes. If a company satisfies our criteria for dividends and potential growth, we’ll invest. Any external factor like government investment in a particular sector then comes as an additional bonus.

“In terms of the size of the companies we invest in, that hasn’t changed. Large caps were the place to be last year, but a lot of that was down to overseas earnings being flattered by weaker sterling. We retain our bias to quality small and mid-caps and there seems to be an increasing acceptance that these younger, more dynamic companies are an important source of sustainable and growing dividends, as well as having superior potential for capital growth.”

“We’re interested in quality, sustainable dividends and we like to see companies with many lines of defence so they can maintain their payouts even in tough times.”

“Our multi-cap approach is an advantage. It means that rather than 90 or so FTSE 100 companies, we have an investment universe of 600-700 stocks. That’s a big opportunity set, so there are plenty of companies to look at to identify those that meet our criteria.”

Five Years’ Discrete Performance

Fund 02/16 to 02/17 02/15 to 02/16 02/14 to 02/15 02/03 to 02/14 02/12 to 02/13
Marlborough Multi
Cap Income Fund 7.02% 0.40% 4.72% 37.40% 23.46%

Source: Morningstar, bid-bid, net income reinvested

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 shares of smaller companies may be less liquid and their performance more volatile over shorter time periods. The Fund invests mainly in the UK. Therefore it may be more vulnerable to market sentiment in that country. To ensure that the principal objective of providing an above average and subsequently increasing level of income can be met, the annual Manager’s charge is deducted from capital rather than income. Future capital growth may be constrained as a result.

Regulatory Information

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 or by calling 0808 145 2500. This document is provided for information purposes only and should not be interpreted as investment advice. 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 needs 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 30/01/17.

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