Giles Hargreave has been one of the UK’s top small-cap fund managers for more than 20 years, but his stock-market pedigree goes back a lot further. His great-grandfather founded a broking firm in Blackpool in 1886, to serve the growing wealth of merchants in Manchester and Liverpool, and it has been in the family ever since. But while most regional brokers have gone the way of family butchers and full county cricket grounds, swept away in the fallout from the Big Bang, Hargreave Hale has gone from strength to strength thanks to the exceptional management and stock-picking skills of its fourth-generation chairman, who merged his own fledgling investment management business with the family firm in 1988.
The business lately passed £7 billion in assets under management, made up of £3 billion of traditional private-client business and £4 billion in its market-leading small-cap funds. Anyone who put £1 into Hargreave Hale’s Marlborough Special Situations fund at the outset in would have seen it grow more than 30-fold since Hargreave is a shrewd and immensely likeable Old Harrovian, who gave up on Cambridge after a year and decamped to the City instead.
He remains disarmingly modest about his achievements, most of which he likes to attribute to his longstanding colleague George Finlay, whom he met in a checkout queue at Sainsbury’s. ‘I’ve been very, very lucky to find George. Because he’s not only very clever, he’s also tremendously good company and he’s very unassuming. I’ve been able to take all the praise. No one’s ever heard of him, whereas you can’t keep me out of the press. But George has been great to work with — brilliant ideas.’
It turns out that unconventional recruitment has played a large part in Hargreave’s ability to man the engine room of his three main funds, all of which specialise in the small- and mid-cap sectors of the market. He met one recruit in a Soho bar, another on a racecourse, a third on a railway platform. All have turned out to have a gift for picking stocks.
The firm now employs 230 people, with a head office in London’s Baker Street, a back office still in Blackpool, and a growing network of small regional offices. In addition to its mainstream funds, the business also offers AIM-share-based inheritance tax portfolios and venture capital trusts. Hargreave himself still runs his own funds, but has handed over managing the business to younger colleagues.
What’s unusual about his funds is that they have churned out impressive gains despite having so many stocks in them. Other small-cap fund managers often go for ‘high conviction’ portfolios made up of a much smaller number of stocks, which give more of a rollercoaster ride (or more ‘specific risk’, in industry jargon).
Hargreave’s style is different. His Special Situations fund has more than 200 names in it, but few account for more than 3 per cent of the portfolio, despite his core investing principle, which he explains thus: ‘What I’ve learnt is that you maximise your winners and you minimise your losers. It’s not very clever stuff, but that’s what you do. You average up and you don’t average down. On the whole, that is; there are always exceptions to each rule. But generally you average up. You look for the winners, you analyse why they’re winners, you decide that they’re going to go on being winners and then you buy some more. And if something starts to go wrong, you don’t let it sit there … get out of it as best you can. If you think about it, it’s not a difficult concept.’
His team do a lot of research — a steady stream of smaller listed companies troop through the Baker Street office — and Hargreave is one of every broking firm’s first calls for share placings and initial public offers. But he says that a lot of the game is just common sense, keeping your eyes and ears open. ‘The share starts to do well: why is it doing well? Because it’s trading well. Who knows that it’s trading well? Everybody who trades with it. There’s certain information that’s going to come up on any company … and there’s no reason not to find it without doing anything faintly improper.’
Another key principle is that good companies tend to stay good companies, so it pays to stick with them. With almost perfect recall, Hargreave reels off a list of names and prices of longstanding holdings. Like Dechra, which makes vaccines for pets: he first bought it at £1.35 in April 2004; by 2006 he had 400,000 shares at £2.13 and now he holds 1.5 million shares at £17, a stake worth more than £25 million. More recently the soft-drinks company Fever-Tree has been another runaway success.
What about disasters, I ask? ‘Oh God yes, plenty of those. But the key is to limit your disasters. If you only lose your money once, assuming the thing goes bust, then you lose your money once, but if you have also made 12 times your money in a Fever-Tree, then you can afford the odd disaster.’
When things go wrong, he says, it’s almost invariably the result of poor management and/or too much debt. ‘Companies can be unlucky, but if you don’t have too much debt and you’re not committed beyond your means, they you probably survive, even if you happen to be the wrong business at the wrong time. But there is really not much excuse for us being in over-geared companies. We shouldn’t do it and if we do do it, we deserve to be smacked.’
At a time when stock markets look expensive by any conventional measures, what is he saying to clients? ‘I think it’s very dangerous not to be invested at the moment. We were worried a bit about there being too much inflation and therefore interest rates going up too much. But those who know — Mario Draghi of the European Central Bank and others — seem to be pretty convinced that the concern should be on the other side; that there isn’t enough demand and it needs further stimulation. Which means it’s pretty unlikely that interest rates are going to go up and pretty unlikely we’re going to get severe inflation … if we’re going to have a period of low inflation, low interest rates, a growing world population, and the Chinese seem to be well under control — we’re certainly not worrying about them any longer — it’s a pretty good scenario.’
And Brexit? ‘It’s no good asking me anything about Brexit because no one’s got a clue. It seems to be in nobody’s interest for there to be a hard Brexit or for there to be really difficult negotiations. It’s in every-body’s interest to get something sensible done. I think Mrs May has done well to call the election. I think it will make a difference if she’s got a big majority to strengthen her hand. And Europe’s beginning to do rather well now, I think. Trading seems to be very good. Our European fund has done tremendously well.’
‘So I think the worry for an investor is being out of the market. However, I must warn your readers I do tend to be bullish. George [Finlay], on the other hand, tends to be rather more cautious. You should probably ask him what he thinks.’ But George, as is his wont, is not in sight. Hargreave’s fund, up 30 per cent over the past 12 months, offers its own verdict on the subject.
This article first appeared in The Spectator in May 2017. You can read it on the paper’s website here.