Fiducia Wealth Management
Share this article

The financial marketplace continues to experience such unprecedented upheaval. Our Investment Committee is working continuously to adapt our portfolios to accommodate and protect against any global fluctuations.

Like our own Investment Committee, the Portfolio Managers of the funds we invest into are having to address, adapt and evolve throughout this period too.

We recently caught up with Eustace Santa Barbara, Co-Manager of the Marlborough Nano-Cap Growth Fund in a Fund Manager Q&A – a series we’re running, enabling us to provide our readers with insights into the strategies some of the managers within our portfolios deploy.

Who is Eustace Santa Barbara?

Eustace is a graduate of Harvard University. He joined the investment team of Marlborough Fund Managers from Close Brothers in December 2013. He has worked as both an analyst and fund manager and has over 16 years’ experience on the buy-side.

So let’s take a look at Eustace’s answers to our questions…

Fund Manager Q&A:


1. What is the investment philosophy of the fund?

What we seek to do for our investors is to grow their capital by investing in the shares of some of the UK’s smallest listed companies, what we call ‘nano-caps’, which represent at least 80% of the stocks we hold at any given time.

What we mean by ‘nano-caps’ are companies that have a market capitalisation, the total market value of all their shares, of £100m or less at the time when we initially invest.

These companies are real minnows compared with FTSE 100 businesses such as AstraZeneca and Royal Dutch Shell, which have stock market values of around £140 billion and £130 billion respectively.

The interesting thing about smaller companies is their growth potential. Companies don’t start out as global giants. Even Apple, which has a stock market value of over $2 trillion, began life with two friends working in the garage of a house in California.

The stock market giants of today all started life as much smaller companies. These smaller companies tend to be younger businesses, often shaking up existing markets with innovative new products and services or opening up completely new markets. When a smaller company’s products or services take off, there’s significant potential for growth.

The flipside is that these smaller companies can run into difficulties. If, for example, the innovative new product they’re selling doesn’t work as well as expected or there just isn’t the demand they hoped for. When that happens the share price can fall sharply.

So, what we’re trying to do as fund managers is work out which of the minnows of today have the potential to turn into the success stories of tomorrow. And avoid the ones that are likely to run into trouble. We’re not necessarily looking for the next Apple – though we’d love to find it – just companies with strong long-term growth prospects. Then we’ll invest on behalf of our investors so they can, if we get it right, reap the benefits.

2. How is the portfolio constructed differently from the benchmark?

We’ve been set an objective of outperforming the FTSE SmallCap Index (excluding investment companies) over any ten-year period. So that’s our performance benchmark. It’s an index of companies that are included in the FTSE All-Share, but too small to make either the FTSE 100 or FTSE 250.

However, the make-up of the fund is very different to the FTSE SmallCap. We’re ‘active’ fund managers, so rather than just passively copying an index and its performance, we use our expertise and experience to decide which shares to buy, with the aim of outperforming the benchmark.

We study companies very closely and decide which ones have the growth potential to deserve a place in the portfolio. We’ll include some stocks from the FTSE SmallCap, but also those listed on the Alternative Investment Market and the FTSE Fledgling, so we’re fishing in a much larger pool than just the FTSE SmallCap, and there are always interesting new companies coming on to our radar.

The sheer number of companies to choose from is one of the attractions of investing in smaller companies and there are fewer fund managers and investment analysts looking at them, so, by doing our own research, we have an opportunity to identify businesses with strong growth potential before other people do. That’s one of the things that’s so interesting about our job.

Looking at all these companies is a labour-intensive business, so my Co-Manager Guy Feld and I work with a team of more than a dozen investment professionals, who have a huge amount of experience investing in smaller companies.

We study company reports and other information and, if we think there’s the growth potential we’re looking for, we’ll meet the management team to hear their vision and their strategy. If we like the company’s story, we’ll consider investing, but our initial positions are usually less than 1% of the fund. That’s because smaller companies can run into trouble – and we’re very conscious of that risk. So, what we’ll do is wait to see if the company delivers on its goals. If it does, then we’ll consider buying more gradually over time.

Those small positions mean our fund is highly diversified, we hold more than 140 companies. One of the advantages of this approach is that if an individual company runs into problems then the overall effect on the portfolio is limited. It also means we can have exposure to a very broad range of different companies.

3. Did the fund strategy change during the C19 pandemic and if so, how?

We have a well-established investment strategy, which focuses on understanding the long-term growth potential of very small companies, investing before most other people have spotted that potential and then sticking with our winners, while cutting companies that don’t live up to their promise. We’re all strong believers in that strategy and we saw no reason to change it because of the pandemic.

In fact, because the pandemic meant that a lot of data about companies was no longer relevant, the fact that we do a lot of our own research and get to know companies really well proved more valuable than ever.

We did sell a number of companies we felt would suffer because of the crisis. However, the pandemic also accelerated some of the investment themes we’d been backing for a while, things like the growth of ecommerce, home-working, digital gaming and the rollout of the 5G network. That meant many of our companies operating in these areas did better than ever.

Another point to mention is that we’re always looking for quality companies on attractive valuations and the market falls at the beginning of the pandemic gave us the opportunity to initiate new holdings and add to existing ones at attractive prices.

4. With inflation rising, how do you see the potential of future rises in inflation impacting the fund?

We hold a significant number of companies with ‘pricing power’ and this is one of the factors that we believe provides the fund with a degree of insulation from the effects of inflation.

We try to objectively categorise all the fund’s holdings into those that are ‘niche’ and those that are ‘commoditised’. About two thirds of the companies are ‘niche’.

By a ‘niche’ company we mean one that provides a product or service that cannot readily be replaced with a substitute. This means the threat of customers sourcing the product or service from another supplier is greatly reduced. This should in turn give the company ‘pricing power’, which is the ability to pass on cost increases to the customer, without them going elsewhere.

When the UK voted to leave the European Union in 2016, sterling fell by between 10% and 15% against many major currencies, including the US Dollar, Euro and the Japanese Yen. This pushed up costs for UK businesses, but many of our companies were able to cushion themselves by passing on the costs to their customers.

Today’s inflation isn’t just a UK issue, it’s much more geographically widespread and covers a wide range of areas including labour, raw materials, energy and freight costs. As such, many more companies are grappling with inflationary effects.

For the time being, many companies are passing on some of their rising costs through price increases. However, it is too early to determine what the effect will be on demand and whether inflation is transitory or more ongoing and structural.

We are watching the situation carefully and in addition to our niche companies, we have some exposure – in the region of 3% of the fund – to precious metals such as gold, silver and platinum. These have historically proven to be a respectable hedge against inflation.

Although precious metal prices have not increased significantly in the past few months, we believe the outlook for them is positive, especially with ongoing low interest rates and stimulus measures by the government.

5. What’s been the worst performing investment you have had over the past year, what have you learned from it and how have you acted on it in your portfolio?

The fund’s worst performer has been IG Design, one of the world’s leading designers and manufacturers of gift wrapping and greetings cards.

The company’s strategy has been to work with the world’s top retailers (including Walmart, Tesco and Amazon), with 40% of sales come from ‘own brands’ for these giants, and because IG Design is a world leader it benefits from economies of scale.

However, the group has suffered from global supply chain issues, labour shortages and significant cost headwinds. Although demand has held up, the availability of shipping has been patchy and the cost to ship cargo has been ten times what it was a year ago. These factors have significantly cut forecast profit margins.

One of the clearest lessons for us has been that even if a company is a global leader in its field, if its profit margins are thin they leave little headroom for unexpected events, especially when one follows another in the way that the pandemic first disrupted supply chains and then pushed up costs.

The share price has fallen around 60% year to date and while we have trimmed our holding marginally, we now believe the balance of risk versus reward for IG design looks attractive.

6. What do you see as the outlook for investing in UK Smaller Companies?

In our view, the key long-term attractions of the UK’s smaller companies remain unchanged. These are the sheer number of companies to choose from, the fact that fewer fund managers and analysts are looking at them and the potential of smaller companies to grow their earnings faster than their larger counterparts over the long term.

We’re watching inflation carefully and mindful of interest rates rises, but in our view the most likely way things will play out is that increases in rates will be at a slow pace.

Meanwhile, the UK equity market continues to look good value compared with the stock markets of other developed economies and a reduction in market exuberance in recent months has resulted in company valuations looking more realistic. In addition, by taking a selective approach we’ve been identifying some interesting opportunities in the initial public offering (IPO) market.

We’d like to thank Eustace for his time and excellent insights provided.

At Fiducia we are continuously looking to deliver outstanding value and expertise to our clients, if you have any questions regarding your investment portfolio please do not hesitate to speak to a member of our team. We are a multi award-winning Chartered Financial Adviser based in Colchester, Essex. Our advisers will ensure you have the right investments to help you meet your financial goals, in a tax efficient way that works for you.

Risk Warnings

Eustace Santa Barbara is an Investment Manager of the Marlborough Nano-Cap Growth fund. These are the investment manager’s views at the time of writing and should not be construed as investment advice. The opinions expressed are correct at the time of writing and may be subject to change.

Capital is at risk. The value and income from investments can go down as well as up and are not guaranteed. An investor may get back significantly less than they invest. Past performance is not a reliable indicator of current or future performance and should not be the sole factor considered when selecting funds. The fund invests in smaller companies which are typically riskier than larger, more established companies. Marlborough Fund Managers Ltd is authorised and regulated by the Financial Conduct Authority (reference number 141660).