He has led his five-crown rated Cazenove UK Smaller Companies fund to the top decile of the IMA UK Smaller Companies sector over a one, three, five and 10 year period. The £503m fund is number one over a three year period, with returns of 127.94 per cent.
Performance of fund versus sector and benchmark over 3yrs
Source: FE Analytics
While many managers claim they are “bottom-up” and “ignore macro noise”, when talking to Marriage it’s very clear he means it.
“I have no interest whatsoever in what’s going on in the news,” he said. “I only care about the companies.”
The manager invests much of his portfolio is companies with a market cap of between £50m to £100m in a very high conviction manner.
“When you have 2 or 3 per cent in a company that doubles or trebles in share price, then you really move the needle,” he said. “This is why the fund has done so well.”
Fellow FE Alpha Manager Daniel Nickols recently warned against such a pure bottom up approach, insisting that it breeds inconsistency.
However, as well as being one of the best performers on a total return basis, Cazenove UK Smaller Companies is also one of the most consistent, outperforming its sector average in six of the last seven calendar years.
“The point with smaller companies is that you can make money in pretty much every market if you get your stock picking right,” he said. “In 2011 the index was down 15 per cent and we still managed to make money.” Cazenove UK Smaller Companies is up almost 45 per cent in the last 12 months. Marriage (pictured) owes his stellar performance to huge successes in companies such as digital rights business Perform Group and Xaar – a world-leading independent supplier of piezoelectric industrial inkjet printheads.
The stocks, which are his two biggest holdings, are up 65.66 and 212.45 per cent over the last year, respectively.
Here, Paul Marriage identifies three companies that have potential to deliver similar levels of success over the next 12 months or so:
Judges Scientific
This £68m company is an AIM-listed company specialising in the design and production of scientific instruments.
“It’s a mini version of a Spectris or a Halma, which are in the FTSE 250,” explained Marriage.
“It’s a lot smaller than these two and has a lot of room to grow. It’s already done well quite recently, but I think this is potentially an attractive target for the big boys in the industry.”
Performance of stock in 2013
Source: FE Analytics
Judges Scientific’s share price is up 34.24 per cent year-to-date, but given how small it is, Marriage thinks it could gather more momentum in the coming months.
The company is currently yielding 1.2 per cent, and has a forward price-to-earnings (P/E) ratio of 17 times.
No fund in the IMA universe holds it in its top-10.
Renold
Marriage points to manufacturing company Renold as both a growth and value play.
“This is a world leading brand in certain types of industrial chain,” said Marriage. “It has recently been discredited by cheap opposition which depressed earnings, but it’s recently seen a management change which has seen some improvements.”
“Renold took the chairman and chief executive from Filtrona, who I know very well.”
“We bought early in to a downgrade cycle. The margins aren’t right at the moment because of poor management in the past, but we think improvements in operations can see them do well again.”
Renold is down more than 21 per cent over the last year, according to FE data, and has also lost money year-to-date.
Performance of stock over 1yr
Source: FE Analytics
Renold has a market cap of £49m, and has a forward P/E ratio of 15 times.
Telford Homes
Property developer Telford Homes is currently Marriage’s seventh-biggest holding, making up 2.11 per cent of his fund. Cazenove UK Smaller Companies is the only IMA fund that holds it in its top-10.
It’s another company that has made a strong start to the year, but Marriage thinks this could just be the beginning, given the recovery being witnessed in the housebuilding market.
“For every £25m house that is being bought by an overseas investor in Chelsea, there are another 500,000 homes being bought on the edge of zone one,” said Marriage.
Performance of stock in 2013
Source: FE Analytics
The £128m company has a forward P/E ratio of 21 times, and is currently yielding 1.5 per cent.
Johnson Service Group
This £115m company is on a forward P/E ratio of 9 times, and is currently yielding 2.5 per cent.
It operates in the workwear and textile rental sectors, and also has a dry-cleaning arm.
Marriage has held the company for some time even though it has failed to perform in line with his portfolio; however, he thinks it is now beginning to show signs of improvement.
Performance of stock over 10yrs
Source: FE Analytics
“We’ve held it for a long time, and have had to be patient,” he said.
“Just recently it posted positive like-for-like sales for the first time in a very long time, which is very encouraging.”
No IMA funds hold Johnson Service Group in their top-10.
Marriage says he likes to invest in companies much earlier than his rivals, because this is where a lot of the upside tends to be.
“Noone had heard of Xaar a few months ago and now everyone wants a piece of it,” he said. “I actually think this one has a bit further to run, but we were fortunate enough to get in there early.”
Though Marriage has a big portion of his portfolio in micro caps, he says he’s only seen a handful of defaults in his career.
“We’ve had very few zeroes,” he said. “Snooze Box was one, but we can take those kind of hits because so many have worked.” “A big advantage for us is that we also run the long/short fund next door, so we naturally have a stronger sell-discipline than most,” he added.
Marriage heads up Cazenove UK Smaller Companies with John Warren. The fund has a minimum investment of £1,000 and an ongoing charges figure (OCF) of 1.61 per cent.
The pair also run the Cazenove Absolute UK Dynamic fund, which can take short positions in stocks.
All of FE Trustnet's articles will be focused on Cazenove today. In the next article, we speak to co-head of the fund of funds team Robin McDonald about why he's avoiding large cap defensive equity income funds.