Giles Hargreave interview: Lessons from a top small-cap fund manager

20th May '16 by Ben Hobson

22 comments 23718 reads

There aren’t many people who know more about successfully investing in small companies than Giles Hargreave. Along with Eustace Santa Barbara, the affable co-manager of his flagship Marlborough Special Situations Fund, we agreed to meet to chat about strategy, management and the intricacies of running a £1bn+ fund. The venue was a dazzling Michelin-starred Italian restaurant called Locanda Locatelli in Marylebone.

Apart from contending with a volley of questions from me, there were other matters to attend to. Between courses, Giles - who has a definite fun-loving streak - was on the phone directing Special Sits’ participation in an IPO the next morning of car retailer, Motorpoint.

At 68, Giles has stepped down from the day-to-day running of his investment management firm, Hargreave Hale. He continues as chairman and is hands-on in running £1.7bn across three of the seven Marlborough funds the firm handles. At any time he can tell you the precise details of any of his portfolio holdings, aided by a folded spreadsheet that he carries everywhere: “Wherever I go, even at a cocktail party, you’ll find it tucked into my pocket.”

The joint venture with Marlborough - whereby Hargreave Hale manages the funds and Marlborough does everything else - works well. So well, in fact, that since the Special Situations Fund started in 1998, Giles has earned a reputation as one of the top performing smaller company fund managers in the UK.

What comes across more than anything is that Giles and Eustace have a determination for getting under the skin of the companies they invest in. In an area of the market that’s notoriously under-researched, they’ve created an edge by relentlessly meeting and re-meeting management teams and having a keen eye for detail. As for their strategy, they’re looking for fast growth and quality management in businesses that are simple to understand.

With a universe of 2,000 stocks, the £1.049bn Special Situations Fund has an eye-catchingly diversified 204 companies in it. But for anyone concerned about issues of liquidity and capacity, the answer is simple. Eustace believes the fund actually has the capacity to double in size without compromising the strategy or making any major alterations to the stocks it holds…

Giles, it looks like you’re enjoying the freedom of focusing on managing these funds, is that right?

Giles: Absolutely, the funds is what I do! Over time the funds have got quite a lot bigger…

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Rusty2

21st May '16

Thanks for the interview its really interesting to hear fund managers views and strategies. I have invest in several of their funds, Special Situations was one, I'm not a holder at the moment I sold nearly all my funds last year. I prefer his approach to Gervais Williams who's approach I thought was more high risk, really owning millions of shares in companies like STM (LON:STM) is always going to be risky, mainly because you can't get out if things do go wrong and for that type of company it could happen very quickly, only need the government to announce a change in the budget and wallop. I have a small holding in STM (LON:STM) and I'm concerned, its difficult even trading 1,000 shares, I had a stop loss but my broker could not place it. Giles approach has many more shares with smaller holdings so the risk is spread far wider, with small companies I think that is a good approach, also fund size is not such a problem.

David Talbot

IGNORE: SEE THE POST IMMEDIATELY BELOW

Giles Hargreave has the rare qualities of being a brilliant fund manager, whilst also being modest and unassuming. I enjoyed this interview. However, I would take issue with what he said about the AIM market generally, particularly since it could mislead less experienced investors.

You quote Mr Hargreaves as saying "the AIM market has been a fantastic place to be in the last five years. It gets so unfairly criticised but it's a great place for investment".

With regard to the last five years, the annual returns of the various indices have been: AIM -1.49%, FTSE 100 0.27%, FTSE 250 3.00%, FTSE Small CAP. 3.63%, FTSE Fledgling 4.41%, so, on average, the AIM market has been the place to avoid over the last five years. If you look over a longer time period (08/10/03 to 20/05/16) the annual returns picture is similar: AIM -0.36%, FTSE 100 2.94%, FTSE 250 9.43%, FTSE Small Cap 4.33%, FTSE Fledgling 10.10%.

I would suggest far from being unfairly criticised, the AIM market has been very fairly denounced, given the long history of what have been shown to be fraudulent or very suspect companies with imaginative accounting policies which have been allowed to list and trade on AIM. Such companies have been supported by some of the less scrupulous brokers and nomads, have been subject to ineffectual auditing, and there appears to have been very little effective regulatory oversight from the LSE or FCA. Tom Winnifrith and Paul Scott have been champions for the small investor in warning about such companies, but many have been duped.

I am not suggesting that one should completely avoid the AIM market, since amongst "the dross" are some fine companies, but investing in AIM is certainly a case of "caveat emptor". Giles Hargreave has the advantage that he can repeatedly interview company management and sort the "wheat from the chaff", but that option is not available to the small investor (except, of course, indirectly by investing in one of Mr Hargreave's funds).

mayfordinvestments

Great Interview. Some good lessons from a great investor.

carmensfella

22nd May '16

I do think investors can meet management if they attend the regular events run by Mello, ShareSoc and Equity Development as very good examples. Those meetings tend to involve presentations from the better companies on AIM and at Mello it is by invitation only and the management get such a grilling that very few get away with duff stories or false promises. Crawshaws came to Mello when the shares were just 9p and well before Giles got involved in the company.

I must also pick up on a couple of facts within Giles mention of the Crawshaw story which although I totally agree with him he did get wrong....Firstly the company already have 45 stores not 34 so he will probably be in the market buying more shares when he knows they are opening their 46th in two weeks time at will be at 50 by the middle of July !

Also worth noting that Noel has never raised any money..it was already in the bank ready for the roll out once he arrived at the company and for the record Noel and the board are totally against raising any more money as they do not want dilution and have no need for it under the current roll out plan for 15 to 20 stores a year.

Crawshaws are a great example of a very good company on AIM....indeed it was AIM company of the year in 2014 and has multiplied by ten for anyone who bought after seeing them at Mello but I totally agree that you have to be much more selective on AIM. I have always recommended going for well run, family type companies that pay dividends and hopefully have steady growth prospects. Those companies as a group have outperformed nearly every index.

I have held all of the stocks listed in my top 15 for three years and nearly all for the last decade and they have served me wonderfully well http://boards.fool.co.uk/apologies-i-have-not-yet-completed-my-annual-13321507.aspx AIM is a good place to be if selecting very sensibly....but tread carefully until you have met management or can trust the backing of other investors who have done so.

David

I don't really agree about the AIM, yes there are many bad companies on there, but most are easy to spot, avoid Chinese and most foreign based ones will cut out many. If you look at the AIM 100 there are many good companies some quite large like ASOS (LON:ASC). Yes you can find warning as you say, you can also find if fund managers are investing in them. Lord Lee also has done well with AIM companies, as with all shares you have to do some research and yes with AIM you may need to dig a bit deeper. Some have done very well recently such as Dart (LON:DTG) and Victoria (LON:VCP).

Andrew L

Re-reading the article and I think there are clues as to why Giles, Eustace and his team are successful. The key part for me is when Giles states: "Conviction is a very dangerous word, I’m not keen on conviction. Falling in love with shares is a terrible mistake."

He seems to take a much more evidential approach with the view changing over time as more data comes in. This seems like a Holmesian type system of having a thesis but constantly seeking data to challenge the thesis i.e. just watch Sherlock Holmes 1984 TV series.

It seems to me that it is this approach that has made Giles and his team a success. The trouble with the traditional approach of doing huge valuation models is that you get wedded to your initial thesis. Giles and his team are much more nimble and can quickly change tack as they get new data. Giles also seems like a very practical thinker following a simple and clear strategy to hunt out the best ideas i.e. not an adherent of fancy academic approaches or investment schools of thought.

Having said all that size must start to be a hinderance for the kind of strategy that Giles and his team pursues at some point. If they get returns of say 20% then they will hit their £2bn ceiling in about four years. But a great interview.

Ramridge

23rd May '16

Hi Ben - Great article, thanks.
It seems to me that the recurring theme in Hargreave's replies was the quality and constant re-assessment of the management of a company. Once he has established that a company has an outstanding business model which shows above average growth potential, then he maintains focus on ensuring that the management deliver what they promise. Trust and execution become paramount.

Investments in both Fever-tree and Crawshaw are perfect examples of this down to earth, practical and focused approach.

Regards, Ram

smallcapman

With respect, and going solely by the chart above, I honestly can't see why anyone would call him a great investor. There is some decent advice for sure; but his returns are quite mediocre when compared to the CAGR of very good, let alone great, investors.

Scm

So which fund managers are better?

No idea Herbie. I really don't see the relevance of your question.

Scm

But he is a fund manager, I don't think it fair to compare his mediocre performance against non fund managers, that is the relevance.

Have you bothered to actually check his performance over the period that the chart shows? It's less than half of mine in that period; and while I don't have the restrictions, I really don't see how he can be described as a great investor.

There are quite a number of fund investors with better results by the way.

I'll leave it there, as you are clearly of the opinion that he's a great investor. I'll just say that when I spend money for a service, I look for added value!

Scm

Where did I say he was a great investor? Sorry I can't see your performance to compare, so how can I see that you are twice as good as him? Yes I did see the chart, early years not so good but last 6 years has gone up about 300% which is not bad. He is regarded as one of the best small company fund managers.

24th May '16

Whether Giles and his team are "great investors" or not they have outperformed when most fund managers don't. They have also done so with a diversified portfolio when lots of other fund managers have more concentrated portfolios. I think the article states that the assets have compounded at 19% which is a very strong performance over the long-term - not far below Buffett's performance. Hedge funds struggle to get close to that level, over the long-term, or if they do run much higher risk portfolios that can blow up if one or two positions fail. Just look at the failure of a number of US hedge funds in recent years i.e. Bill Ackerman and his failed bet on Valeant. I think with 200 stocks in Giles' fund you can sleep at night if you own it.

As one other poster here stated it also is the case that Giles seems to be a humble person and has established a team around him. Being humble clearly helps in admitting mistakes and moving on. A lot of other prominent investors have a fairly large ego and tend to make themselves the focus of everything. In a previous article I read that Giles praised a person in his team and in this article he praised all the staff. In my experience, these kinds of comments stand out as most prominent investors are loath to let any of the credit go to other people in their company.

Having said all that I wasn't sure if there was a specific investment approach with Giles and his company i.e. other than buy things that are doing well that aren't too expensive. This is a practical and evidential type approach. However, it can lead investors into companies that are temporarily doing well or are in sectors that are temporarily experiencing good times. So I wasn't sure on the filter mechanism they have. It seemed to be to meet lots of managements and check that they have done what they said they would. A very bottom up and labour intensive system. Not having an investment philosophy or filter can be a good thing as it shifts you towards a reliance on the evidence. However, it does also have its downsides.

Ben - as a follow question to Giles it would be interesting to know if he things that a private investor can do well in small caps. This is because his approach is dependent on a huge number of company meetings.

Trigger14

The 19% CAGR is for the Special Situations Fund (which does seem pretty impressive) whilst the graph seems to show something else which appears closer to 10% CAGR (perhaps his performance blended across all Marlborough funds? 10% CAGR would seem pretty reasonable when you consider how much diversification this might capture...)

peterthegreat

3rd Jun '16

I would agree with the posters who explain that you need to be selective on AIM. For me, AIM is no difference from any other market I invest in. I think the AIM companies I have chosen are just as safe as the FTSE-100 companies I hold, in fact I would regard some of the family owned AIM companies I hold as being safer than nearly all FTSE-100 companies. As a financial journalist I met alot of CEO's and FDs from AIM companies and, whilst this was entertaining, I can assure you that you do not need to meet management to determine which AIM companies are the high quality, safe ones. I can determine this from research from a variety of sources such as Stockopedia. I have had money in Mr. Hargreaves funds for many years as well as investing directly in small companies. I have always regarded him as one of the best fund managers in this area but I would also agree that there are more selective approaches which can also be successful. Thanks for the great article Stockopedia.

21st Sep '16

Interesting to note the performance of some of the stocks mentioned in this article. Crawshaw has slumped and On the Beach has also fallen back although not by as much. Not sure a general conclusion can be drawn but I think I read of a stock that Giles liked before that subsequently did badly: Entertainment One. Probably we can only say that small cap investing is a hit and miss game and that even if Giles is optimistic on a stock it could still do badly.

As I said in some previous comments Giles doesn't seem to have an overall approach. Just meet lots of companies and try to buy into what is doing well. Very labour and research intensive and I am not sure it is something the private investor could mimic. Giles is pragmatic though and cuts back when he is wrong. So probably not having an overall approach (value, growth, these sectors) allows him to be very flexible.

jonesj

Over the last 10 years, he managed the top performing UK small cap trust & there are over 100 of them on the list.
I think that is a very very good performance.

Of course there will be individual investors who can take more risks by concentrating on a smaller number of stocks who have done better.
But overall, he has turned in a great performance.

PJ0077

Just goes to show: in investing, a 100% success ratio is neither likely nor required to perform well.

Great portfolio (risk) management is, however, essential.

Giles Hargreave interview: Lessons from a top small-cap fund manager

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Ben Hobson

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