Richard Penny made his name running L&G UK Alpha Trust (GB00B28PT700) and L&G UK Special Situations Trust (GB00B3DMY345), which delivered returns far ahead of markets and similar funds. L&G UK Alpha Trust, which invested in small caps, returned 310 per cent between its launch in May 2005 and July 2018. During that period the FTSE All-Share index returned 168 per cent and the Investment Association (IA) UK All Companies sector average return was 169 per cent.
L&G UK Special Situations, a multi-cap fund, returned 51 per cent between May 2014, when Mr Penny started running it, and July 2018. Over the same period the FTSE All-Share made 35 per cent and the IA sector average return was 36 per cent.
But last year Mr Penny left Legal & General and joined Crux Asset Management, whose funds include FP Crux European Special Situations (GB00BTJRQ064) run by highly regarded manager Richard Pease. In September the company launched a new fund for Mr Penny, FP Crux UK Special Situations (GB00BG5Q5X24). Mr Penny runs it via a blend of the two strategies he used on his former funds, so this multi-cap fund has both value and growth characteristics. He says it will draw on the best elements of L&G UK Alpha's and L&G UK Special Situations' strategies, "and have a similar approach to what Richard does in FP Crux European Special Situations".
FP Crux UK Special Situations is equally split between small-, mid- and large-cap stocks, and each segment is run via a different strategy. This could result in six different investment approaches as each of these three segments include value and growth shares.
For the smaller company segment, Mr Penny plans to invest in extreme growth and value stocks, a strategy he used in L&G UK Alpha Trust.
“The value side will mainly be recovery stocks where we’re part of a refinancing," says Mr Penny. "The growth side will be in stocks such as Fevertree Drinks (FEVR) for which a product really drives the numbers. I like stocks where you have a real growth driver and the business is in the right place.”
The smaller company segment will initially be weighted to value stocks due to the current condition of the UK market.
“We see more recovery and refinancing stocks than growth stocks right now, because there’s a bit more distress in the UK economy," he explains. "The initial starting point is to have about 15 per cent in cash which gives us the flexibility to put it into value deals at low prices. When the market is difficult and people are short of cash they focus on what they already own. If somebody comes along with a business you don’t own which needs some money, [the share issue] gets done at a lower price which helps with the upside. When I’m looking at refinancing deals, there’s not a lot of people that want to do them so we get them at better prices. And if you have a small fund, you have more [opportunities] as you can leverage more of the positions and under-valuations that exist in small caps. We are positioned to do that.”
An example of the fund's value holdings is Hydrodec (HYR), which refines oil for industrial uses. The company's share price has had a torrid time because it has been restructured and is trading at around 69p, in contrast to nearly 400p at the start of 2018. But Mr Penny says that following the latest cash injection into the company, to which FP Crux UK Special Situations contributed, its turnaround plan is nearly completed. Not that this comes without significant risk.
“It’s not for widows or orphans,” says Mr Penny. “But the turnaround has begun – the cash has been raised to improve the accounting margins. It looks like stocks I have bought in the past that have an interesting entry-level price and ultimately some growth. We will find some more of those as there are [other] companies that have assets which have struggled but are starting to turn.”
Mr Penny's growth strategy involves looking for substantial growth in product-led revenues and strong share price returns. “We’re looking for smaller growth businesses to buy at entry level prices," he explains. "As these get bigger you should get an expansion of the rating per pound of share, so get a double whammy.”
But Mr Penny says growth stocks with market caps of between £1bn and £2bn will be the most interesting of the six strategies he runs – the “sweet spot” of UK growth investing. He argues that if you pick the right stocks in this area you can make returns of between 100 per cent and 150 per cent over the medium term. Examples of such shares held by his former funds at Legal & General include NMC Health (NMC), of which the share price increased 510 per cent between April 2015 and September 2018, and GVC (GVC) which increased 237 per cent between December 2015 and August 2018.
“This kind of holding doesn’t always work but you don’t need many of them to get some really good numbers,” he adds.
Although FP Crux UK Special Situations will hold between 22 and 33 mid- and small-cap stocks, its roughly eight large-cap holdings will have as much impact on the fund's performance. These include value and growth stocks, but which are less speculative than some of the smaller companies the fund holds. The large-cap growth holdings are likely to include companies that benefit from demographic trends, and "the value stocks will be high yield rather than recovery and refinancing”, adds Mr Penny.
