The FE Alpha Manager expects the UK economy to go on getting better and expects the FTSE 100 index to eclipse the psychological 6,000 point mark before 2013 – a level not hit since July 2011.
"I’m very bullish right now," he said. "The performance of the UK economy has been understated."
The manager is currently holding an unusually low 2.5 per cent cash weighting in his £472.1m Marlborough Special Situations fund, down from as high as 10 per cent a year ago.
"[Before September] I was almost fully invested anyway. People are less inclined to be in cash and bonds because QE (quantitative easing) is going to create inflation, which will be bad for bonds," he explained.
Among the fund’s largest holdings are British-based investment company Melrose, which specialises in "flipping" the performance of underperforming companies it has acquired, and plastic packaging company RPC Group.
The fund is heavily tilted towards industrials, with 32.5 per cent of the fund invested in the sector, while telecom and technology stocks make up the second-highest sector allocation.
While Hargreave is not a contrarian investor, he says he is going against the grain by tipping industrial stocks in light of the current volatile macro environment, particularly in Europe, but he expects the sector to rally strongly into next year.
The four crown-rated Special Situations fund has delivered nearly 480 per cent over 10 years, making it the second-best performing fund over the timeframe and smashing the sector average return of 187.56 per cent, according to FE data.
However, the fund has lagged the sector over the shorter term, delivering third-quartile returns over one year as markets have been increasingly susceptible to political and macroeconomic turmoil.
"Last year we had some real crackers like Cove that was sold at a big premium and we haven’t really had any of those big winners this year," he commented.
Hargreave says he will stick to his process in the small cap fund, which is one of only four porfolios to achieve top-quartile returns over corresponding five-year periods.
Top quartile funds from 2002-2007 and 2007-2012
| Fund | 2002-2007 Performance % | 2007-2012 Performance % |
| Old Mutual Dublin UK Select Smaller Companies | 355.67 | 33.02 |
| Marlborough UK Special Situations | 309.85 | 41 |
| Investec UK Smaller Companies | 219.19 | 52.92 |
| Standard Life Investment UK Smaller Companies | 202.05 | 43.63 |
Source: FE Analytics
While Old Mutual Dublin UK Select Smaller Companies, managed by FE Alpha Manager Daniel Nickols, has outperformed Hargreave’s fund over 10 years, the Marlborough vehicle has achieved a Sharpe ratio of 1.12 over the period, the highest in the IMA UK Smaller Companies sector.
The ratio measures the fund’s return relative to a notional risk-free investment – in this case, cash. The difference in returns is then divided by the fund’s volatility.
Hargreave has been running Marlborough Special Situations since July 1998.
The fund has a minimum investment of £1,000 and a minimum top-up of £500. It has a total expense ratio (TER) of 1.54 per cent.