Rewarding deductions at Baker Street
FROM their offices in Baker Street, Richard Hallett and his colleagues at Hargreave Hale are successfully detecting the right companies to bring in considerable returns. Alongside Giles Hargreave, Hallett manages the Marlborough Leading Companies fund. Although he is concerned about the macroeconomic outlook – particularly in Europe – he sees plenty of companies that offer growth opportunities.
GREEK BEARINGS
Hallett was much more bullish on markets six to twelve months ago: “Since the beginning of this year, the markets have been very volatile and rangebound, principally because of the macro data coming from the US, Europe and the Far East – in fact, all around the world – have been very volatile and hard to judge.” Although he sees the decline in the pace of China’s growth as quite healthy, he believes it isn’t clear if the industrial slowdown in the US is a soft patch or something more worrying. On Europe, he is much more pessimistic and finds it “very difficult to see a way through.” He says there is “far too much debt in peripheral nations” and the authorities are just “chucking more debt at them – which is just kicking the can down the road.” Given these uncertain times, Hallett likes companies with structural secular growth opportunities, which are not overly affected by a slowdown.
SMALL PROFITS
The Marlborough Leading Companies fund is fairly small, with around £56m in assets under management – but Hallett believes it has room to grow. He thinks a key feature of the fund is its flexibility in being able to put up to 25 per cent in small cap companies. This, he says, gives him the “capability to switch in and out of small funds, depending upon where we are in the economic cycle and how we feel about the environment going forward.” In the downturn, he was biased towards large caps, then, through 2009 and 2010, he upped his ante in small caps. At present, the fund has about 15 per cent in small caps, 25 per cent in FTSE 250 companies and 60 per cent in the FTSE 100.
Three small cap companies Hallett particularly likes are ASOS, Immunodiagnostic Systems and Blinkx, all of which he personally owns. He believes ASOS – the online retailer – has the potential for multiple years of growth from international markets. Although the share price has been astronomical, in the medium to long-term he can see it only going one way. Immunodiagnostic Systems is a world leader in vitamin D diagnostic testing. He describes vitamin D diagnostics as a “very fast-growing subset of the diagnostic testing market,” so sees a lot of growth, particularly in the US. Blinkx is an Aim-listed tech company, which develops advertising revenue from video content on the internet. He notes that following the acquisition of Burst Media it looks strong and has broken into cash flow and profit generation.
BIG GROWTH
Although as a generalisation, Hallett acknowledges that small caps can present higher risks by being less geographically diversified and less mature in their relative industries, he doesn’t subscribe to the view that small caps are necessarily higher risk than large caps. He thinks it is much better to drill down into the inherent risk within each business. Also, he is keen to point out that not all big stocks are defensives. On this front he likes Hargreaves Lansdown, Intertek, Shire and Aggreko, all of which he thinks are still very good growth stocks.
If you are invested in the FTSE 100, you are up to your neck in international oil companies, mining companies and domestic banks. This might be what you want, but investors need to be aware that these are the industries they are backing. The Marlborough Leading Companies fund is exposed to fluctuations in commodities to the tune of 4 per cent, while the FTSE 100 exposes investors to around 15 per cent in commodity fluctuations, Hallett likes the supply side factors for being invested in copper miners over the medium to long-term, but not iron ore miners. Far from elementary, as soon as Hallett has eliminated the unprofitable, whatever remains is in his portfolio.