In her monthly article for Professional Paraplanner, looking at funds around their three-year track record, Juliet Schooling Latter, research director, FundCalibre, examines the TM CRUX UK Special Situations fund.
“For the first time in three years it’s a stockpicker’s market. The easy money has been made in large and mid-cap UK equities, but I really see the value coming down into the small and micro-cap stocks.”
Since launching the TM CRUX UK Special Situations fund in October 2018, manager Richard Penny has had plenty on his plate, having to deal with the continued overhang of Brexit, the fastest sell-off in history and a strong recovery.
Richard joined Crux in 2018 after 15 years at Legal & General Investment Management, where he managed the popular UK Special Situations and UK Alpha Trust franchises. His latest offering invests in UK companies of all sizes, but typically has a greater focus on medium and smaller companies than many of its peers.
That flexibility has been a big boon since launch. Richard says up until a year ago it was a market “where the macro said you buy large companies and dollar earners”. But things are changing.
UK equities have continued to operate at a significant discount to their peers since the Brexit vote in 2016. However, the announcement of a deal at the end of 2020, coupled with a much-anticipated value rally – an investment style the UK is overly exposed to in comparison to the likes of the US – has given rise to more optimism.
Richard says valuations for UK equities have not changed significantly following these events, citing that “international investors are more like oil tankers than speed boats” – meaning there is more scope for re-rating.
His process targets high quality businesses with low levels of debt for this fund. He likes strong management teams and for the business to have an economic advantage and the potential for high returns on capital and growth.
Companies usually fall into two categories: rising stars and fallen angels. Rising stars are quality companies that are growing and have high returns on cash, but whose shares are undervalued in Richard’s view. Fallen angels are the very cheapest shares in the market: the big price fallers and recovery companies, where there is hidden value and discarded quality.
The result is a concentrated portfolio of around 40 names. Performance has been strong, particularly in the past 12 months where the fund has returned almost 60 per cent, double the average of its peers in the IA UK All Companies sector*.
Richard currently has around 35 per cent of the fund in the small and micro-cap space to take advantage of the recovery from this point. He says the number of acquisitions and re-financing by companies, means there are far more opportunities than there are stocks for the fund at the moment.
The shift to the recovery side has resulted in a 10 per cent move away from defensive healthcare stocks into more sensitive areas like software. Richard cites numerous companies doing interesting acquisitions, a good example of which is eyewear business Inspecs, which recently bought German rival Eschenbach**.
While the first year of a recovery in markets is generally the strongest for performance, Richard says the second year can also yield great returns – something which can be overlooked. “There’s still a 10-15 per cent upside in the FTSE 100 and mid-cap stocks from here. But there are opportunities to double your money, particularly in the small and micro-cap stocks,” he said.
Although the focus is on stockpicking, Richard does feel you need to have companies with some cyclical exposure, citing the shift in diversifying away from large growth stocks and bond proxies.
We have known Richard for a long time and believe him to be a very talented stockpicker – exactly what is needed for those navigating this recovery in UK equities for the long-term.
*Source: FE fundinfo, total returns in sterling 1 October 2018 to 25 June 2021 (one-year figures from 27 June 2020 to 25 June 2021)
**Source: Businesslive.co.uk
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Juliet’s views are her own and do not constitute financial advice.
