Younes, analyst on the FE Research team, has based his decision not on performance, but the manager’s active stockpicking approach over the period.
"Despite slightly underperforming its sector average, this is my fund of the year because I believe the manager has taken advantage of favourable buying opportunities, even if they have hampered short-term performance," he said.
Performance of fund vs sector in 2012
Source: FE Analytics
"In May and June when markets were highly volatile, the portfolio was adjusted, with Hargreave repositioning his portfolio toward less cyclical companies that traded at low levels."
"While this bet won’t pay off in the short-term, the fund has very good upside potential and should profit over the long-term."
Hargreave (pictured) added TalkTalk, Amerisur Resources and Energy Resources of Australia to his portfolio this summer and upped his weighting to Carclo, Geiger Counter, Dixons, Micro Focus, SDL, Synergy Health and Polo Resources.
Younes rates him as one of the best stockpickers in the UK market, and given his bullish outlook for small caps, is confident the manager will deliver in the long-term.
"I'm a strong believer that large capitalisation markets are efficient and it is hard to outperform over the long-term in these," he explained.
"On the contrary, I believe small and micro cap markets are inefficient and some fundamental-based stock pickers are able to make long-term gains."
"I think Hargreave and his team are among the best at this, due to the managers’ very extensive experience in these markets, the size of assets under management – which gives him a lot of flexibility – and his personality."
Performance of fund vs sector over 10-yrs
Source: FE Analytics
Marlborough Special Sits has returned 487.88 per cent over the last decade, compared with 208.31 per cent from its IMA UK Smaller Companies sector average and benchmark. Only Old Mutual Dublin UK Select Smaller Companies has returned more.
The fund is also a top-10 performer in the sector over three and five years.
Hargreave runs a diversified portfolio of more than 200 companies, with no single stock accounting for more than 2 per cent of assets.
"I believe that the simplest portfolio construction methodology in small caps is the most efficient – hence I tend to agree with Hargreave that investing in a very large number of stocks is the best way to diversify risk," said Younes.
The £496m fund has a minimum investment of £1,000 and a total expense ratio of 1.54 per cent. It has four FE Crowns.