Cazenove UK Smaller Companies fund manager Paul Marriage is a pure stock-picker. He is unequivocal and unapologetic about it: "I don't do macro, I do stocks. I don't do sectors. I do stocks." And his stock-picking record over a long time period has yielded a consistent and healthy outperformance of his peers in the UK smaller companies sector.
Such consistency of performance isn't a coincidence, it's one of his key objectives: "Any small-cap manager now and again is going to have a stonking year if you get a couple of penny shares right and a couple of bids come in. But if you are going to have a couple of podium years you have to follow it up with decent years rather than 'hero-zero, hero-zero'. We have put in some great years but in the intervening years we've been near or in the top quartile or top decile."
True to form, the Cazenove UK Smaller Companies Fund has outperformed this year too, despite the recent market sell-off. Mr Marriage said: "This year has been a good year. When I last looked, the small-cap index was down 7-8 per cent, but we're up 8-9 per cent. If we can deliver a positive return this year, decently ahead of inflation, then people will be pretty pleased."
A refusal to consider a macro overlay means Mr Marriage has not been overly perturbed by the recent market sell-off: "I'm not panicking. The trick is not to get too sucked into it and be disciplined. Step back and have a think about it. It has been a difficult month, but we've got to keep plugging away."
Mr Marriage has honed his skills in the small-cap world for 12 years. Indeed, even before his first job he cut his teeth at university, when his mother gave him a personal equity plan (Pep) to invest each year. His initial fund management ambitions were nearly thwarted when his first employer, a small eastern European fund management house, went bust. But after a short spell "selling TM Lewin shirts" he was given a job with Clerical Medical, later to become Insight Investments, where he worked with several fund managers including Iain Scotland and Simon Shaw, who influenced his style. His relationship with fellow Insight fund manager Neil Pegrum eventually led him to follow Mr Pegrum to Cazenove five years ago.
He believes that his other roles at Cazenove, including running a long-short hedge fund, help him in his running of the small-cap fund, as they give him a more rounded view of the market. But the Smaller Companies Fund is avowedly smaller companies focused, typically investing in around 45 companies, the majority of which fall into the £50m-£500m range.
Around three-quarters of the stocks in the fund are chosen using Mr Marriage's "P3M" criteria for stock-picking. That's Product, Market, Margin and Management. Within this, companies are chosen for their differentiated product, typically backed by investment in the product - be it a world-leading digital camera such as those sold by core holding Andor Technology, or a strong brand such as cash and carry business Booker. The business must also be a market leader in its market and these two factors should produce the third factor - a good and growing margin. Finally, Mr Marriage likes an incentivised management team who invest in their business. He will also, to a certain extent, follow management teams who have been a success elsewhere such as the team at industrial property investment business Hansteen. Other key holdings that meet the P3M criteria include aviation logistics business Menzies and industrial printing business Xaar.
The remaining fifth of the fund is populated by undervalued companies which can produce strong outperformance if timed correctly, such as the purchase of Hogg Robinson last year, since when it has doubled in value. Mr Marriage said: "Sometimes you get great value that you can't miss out on. Hogg Robinson, a year ago it was valued at less than five times forecast earnings. When something is on less than five times, you need to know why. Some may be in structural decline but last year BA was telling us corporate travel was picking up. We got the management in. They explained everything and it has been a good solid investment."
With no sectoral bias, Mr Marriage will continue picking stocks according to his tried and trusted stock-picking formula. Themes that he believes may further benefit his performance in the months to come include increasing mergers and acquisitions activity, such as the recent bid for Holidaybreak, and the increasing tendency of smaller companies to increase their dividend payouts.
With a strong record, Mr Marriage appears justified in having a strong belief in his convictions and, as he points out: "P3M stocks are probably not a bad place to be at the moment." For this reason he is unperturbed about the market sell-off: "The market feels a bit oversold at the moment. I've not met a company yet that is really worried about the next six months. We have just got to be diligent."
