Richard Penney, fund manager of the CRUX UK Special Situations Fund, believes the eschewing of the UK by investors since the Brexit vote in 2016 has made it a cheap market into which to be buying.
The CRUX UK Special Situations Fund holds around 50 stocks, predominately small (c.30%) and mid-cap (c.35-40%), with 5-6 large caps names each with a 3.5-5% view. Penny says the fund looks to “find businesses where the price is wrong or they are producing growth but are not highly price”.
The fact that the UK has fallen out of favour in recent years, primarily as a result of the uncertainty caused by Brexit, has seen international investors underweight the UK. This has put it in a position not too dissimilar to where it was 10 years ago, in terms of adjusted price-earnings ratio, Penny says.
Historically, this measure is indicative of the country’s future performance, with a low P/E such as now, suggesting “fairly good future returns” he explains. “It suggests that this a cheap market in which to be buying – with the usual caveats – and, of course, it does guarantee that the market won’t go down.”
Europe is in a similar place, he adds, but the US is above where it was in 2009/2010. “The UK is at a 15 year discount against Europe and a 50 year discount against the rest of the world.”
Penny describes the UK as “a bit of a pariah market, with a lot of bad news in the price, while the US has the tech darlings but they are pretty expensive to buy.”
However, he adds, the UK is a very polarised market with the 10% most expensive stocks on PE ratio as expensive as they have ever been against the cheapest. “What that is telling me is that if you want to play in the cheaper UK market it may not be the funds that have done brilliantly over the past 3-5 years that continue to do so.”
Buying opportunities
Penny says the last time there was this type of cross-over of moves in technology and sell off in markets was in the late 1990s and 2008/09.
“When you get a big sell off it presents a real buying opportunity for selective funds,” he says.
Where he is looking to buy is smaller businesses that may play the same trends as the technology giants. “In the small and micro-cap space there are some very interesting businesses which have potential for long term growth, not least because they are at a significant discount to the US tech stocks.”
Software and healthcare and life sciences are particular focusses at present. “There is interesting change occurring, in computing and technologies with artificial intelligence, big data and the internet of things, and in life sciences around genome sequencing with the results of research over the past 10 years or so being seen in gene therapy and real increases in survival in cancer with hundreds of drugs coming through.
“The London/Cambridge/Oxford triangle is providing companies that are very interesting, and which are under-priced because small caps are out of favour. Selectively, there are companies that have made huge strides in the past couple of years. We have done well with them,” Penny says.
UK pick up
The underweighting of the UK by international investors, means there is opportunity for money to come flooding back in, Penny believes
“As we have seen after past market events, markets do recover and the longer investors’ time horizons the more encouraged people might be about the prospects for the UK. There is potential for the upside to be quite big.”
