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18th June 2015

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Giles Hargreave, co-manager of Elite Rated Marlborough UK Micro-Cap Growth

Giles, please give us a brief outline of your role in fund management today

“I have managed the Marlborough UK Micro-Cap Growth fund since launch in 2004, co-managing it with Guy Feld for the past three years. I also co-manage the Elite Rated Marlborough Special Situations. I began my investment career in 1969 at James Capel and in 1986 founded Hargreave Investment Management, which I merged with Hargreave Hale & Co, a stockbroking firm controlled by other members of my family, in 1988. Today, in addition to my role managing the Marlborough funds, I remain Chairman of Hargreave Hale.

Tell us more about the UK Micro-Cap Growth fund

Marlborough UK Micro-Cap Growth invests primarily in UK companies with a market cap below £250m and in many cases less than £150m.

“In our view the evidence is clear that these companies offer superior growth potential over the long term. They are often innovators and niche players and their size means they can deliver a more nimble response to changes in the business market.

“One great advantage of investing in small companies is the sheer number of stocks from which to choose. The AIM, FTSE SmallCap, FTSE Fledgling and FTSE techMark indices are home to well over 1,000 companies operating in diverse fields ranging from ‘big data’ management and software through to pharmaceuticals and logistics.”

How do you manage the risk that comes with investing in smaller companies?

“When a small company succeeds it will significantly outperform a larger one, but it is also true that unpredictable things happen to small companies. To manage that stock-specific risk we hold a portfolio of more than 200 holdings. We start with a small investment and then, as management deliver on their promises, we build our position. However, even our largest holdings rarely account for more than 2% of the fund. This diversified portfolio is a key advantage of gaining your exposure through a fund like ours.

“Ours is very much a ‘bottom-up’ stock-picking approach, we focus on the quality and growth potential of individual companies, rather than making ‘top-down’ calls on sectors based on macroeconomic conditions. We keep a close eye on the economic backdrop and this informs our investment decisions, but first and foremost we are stockpickers.

“Companies at this end of the market-cap spectrum are generally under-researched. Because we have a large and experienced investment team, we are able to conduct our own primary research to unearth opportunities before the wider market identifies them.”

How important are face-to-face meetings with company management?

“One of the most important things we look for is quality management, which is one of the reasons we believe face-to-face company meetings are essential. Hearing what they have to say is important, of course, but you can also learn a lot from things like body language.

“Between us, my team and I meet on average five companies every working day. It is an opportunity to question the management and identify any possible risks. Are they, for example, trying to go too far, too fast? Or is their approach a measured and sensible one? It is very rare for us to invest without first meeting the management.

What type of company do you like to buy?

“We like companies that are operating in niche markets, where they are not competing against a large number of other businesses. One such is pharmaceutical company Clinigen, which is a leading global supplier of specialist medicines, providing treatments for rare and life-threatening diseases and drugs for use in clinical trials. It is a multi-billion pound market and Clinigen has just acquired its biggest rival, Idis.

“An important element of our strategy is to run our winners. When one of our companies has got it right and the share price is rising, we let it run, rather than snatching profits early. The performance of document storage company Restore shows just how important this can be to returns. We bought shares in the company in 2010 at around 25p and could have sold them for three times that figure the following year. Instead we held on and the share is now worth more than ten times what we paid for it, a ‘ten-bagger’ as it is known in the investment world.”

What is the outlook for smaller companies?

“After a very strong run, micro caps took a pause for breath during 2014 and the early stages of this year as the attention of many investors switched to FTSE 100 companies. However, blue chips have become quite expensive and as investors look elsewhere for opportunities we have definitely begun to see renewed interest in micro caps.

“Looking ahead, we believe interest rates will be key to the performance of UK equities. If they remain near their current low levels for several years then this will maintain the positive environment for equities. We saw UK GDP growth weaken in the first quarter and the economy slipped briefly into deflation. The US too has been slowing down. If this environment continues then interest rates could remain low for some time to come and UK equities are likely to reap the benefits.”

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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. Giles' views are his own and do not constitute financial advice.