The top-performing fund manager is relishing the task of shaping his new Crux UK Special Situations fund and a fresh opportunity to test his eye for undervalued UK companies.
Richard Penny has done his homework. He enters the meeting room on the first floor of Crux Asset Management’s Pall Mall offices clutching the latest issue of Money Observer and keen to talk about a recent feature on whether the size of a fund matters. He thinks smaller funds do better – which bodes well, as in September he launched a new special situations vehicle at the boutique fund firm, which he joined this summer after 15 years at investment giant Legal & General.
“I won Money Observer awards in 2009, 2010 and 2011,” he says. It sounds as though he’s keen to pick up more gongs, though. He adds: “I don’t think we got as much recognition as we might have done [on the L&G Alpha Trust] because I was working for what is effectively a passive investment house.”
There’s nothing passive about Penny’s approach to investing, however. His L&G Alpha Trust gained a reputation for an ability to outperform, having delivered a return of 319.2% under his tenure between 2005 and 2017 – almost double the UK all companies sector average of 162%. In less than three years of running the L&G UK Special Situations fund, he delivered a return of 51.5%, compared with a sector average of 32.4%.
However, Penny then had his hands metaphorically tied on gardening leave for several months and has been itching to get going again. Unsurprisingly, he has been hard at work building his new portfolio since the Crux fund launch.
He admits it was frustrating spotting opportunities and not being able to act on them over the summer. But the time was not wasted, as he was able to meet a steady stream of firms to generate ideas for the new fund. He will have 15 company meetings in a typical week, and he estimates that he has met around 6,000 company bosses over the course of his career.
“When you have 100 or so stocks, a lot of time is spent looking at what you already have, rather than searching for new ideas,” says Penny. “Also when you have run a fund for a while, you will justify holdings you might not buy again. It’s a behavioural psychology thing whereby when you buy something, you instantly think it’s worth more. You don’t have to do that with a new fund.”
But you do have to make a whole new set of choices and they need to be good. The stocks that make it into the portfolio will define the performance of the new offering and determine whether investors who have followed Penny to Crux were right to do so. He is aware that even though he is taking a longer-term view, he will be judged by investors on the numbers he turns in over the next 12 months.
So what can investors expect? The portfolio will contain around 40 holdings. Some will be familiar names that featured in his previous funds – Prudential and NMC Health, for example – while others will be new as the fund takes advantage of its ability to back small-cap stocks. Penny is not averse to participating in IPOs, but he is selective and says the business has to prove its model is working. “I don’t want to just be providing an exit for existing investors,” he says.
The fund will look a little more like the L&G Special Situations funds than the Alpha Trust, with a focus on some of the recovery-type stocks that Penny finds most interesting. “I get excited by a company that floated a year or so ago and is down 70% where there is a change of management or more money being put in,” he says. Penny is looking for good businesses he believes have been mispriced. He aims to buy shares either when they’re having a bad day or before other investors have spotted the opportunity.
He thinks small oil producers are well-placed currently as, unlike larger firms such as Shell and BP, they are able to grow their output. Elsewhere, he thinks telecoms firms such as Vodafone and BT look good value, although he is avoiding the latter because it is too UK-focused, despite the tempting 8% yield on its shares.
Fondness for big names
It’s a tricky time to be launching a new fund. Following a bull run that has lasted almost a decade, global stock markets have undergone a sudden sharp sell-off at the time of writing. Penny is cautious on UK stocks and will veer towards large-cap, higher-yielding companies, which should be less affected by negative Brexit-related news.
Penny considers himself a bottom-up investor, but he concedes that it’s worth paying attention “if you have Mark Carney warning about the housing market in the event of a bad Brexit”. While he loves to find small-cap opportunities, he says it’s important to bear in mind that making the wrong call can easily lose you half your money. “The small-cap 10-baggers are always the ones that stand out,” he says, pointing to examples such as NMC Health, Hutchinson China MediTech and GVC Holdings, all of which have seen their share price more than double in recent years. “It means people never see the reliable returns from steady stocks such as Pru.”
Penny values big names: such stocks were the ones that generated some of his first investment returns when he was just 16. “A lot of people in this industry fell into it by chance, but I am not one of those people,” he says, recalling the first time he made money on an investment. He put £100 into BT shares when it was privatised in the 1980s and quickly tripled his money. It seemed a far better use of his summer holiday than making a few quid gardening, he says.
Penny went on to participate in other privatisations, including Royal Mail, before starting to pick out companies on the stock market such as frozen-steak producer Dalepak.
While there has been a spate of top fund managers starting up their own firms in recent years, Penny hasn’t been tempted by this. He says: “You have to realise what you’re good at, and I don’t think I’d be good at running a business.” He is excited to be working alongside European fund manager Richard Pease, who he says is “one of the best investors in the UK”.
Money Observer likes fund managers with skin in the game, so it is encouraging that Penny was an early investor in his new fund. He has put profits from investments in his L&G funds straight into Crux UK Special Situations. He is confident about his new venture and keen to get started. Now we’ll see whether investors will follow him to pastures new. “Some might have capital gains tax problems if they do,” he says with a laugh.
Richard Penny in six
1 My best investment…Geo Interactive was the best in terms of returns: its shares grew by 220 times. It was a tech company that let you watch video clips on your phone. But it was easy to make those returns in the dotcom boom, so it’s not the investment I’m most proud of.
2 My worst investment and the lesson I learned was…Probably Micon, because I kept buying shares even though they were going down. It was a lesson about not investing in a business that is in structural decline. Sometimes you just have to let go. In the end, we were down by about 80-90% before we got out.
3 My alternative career would be…I did an engineering degree, so maybe something to do with that. I’m quite good with numbers. Or something involving computers.
4 If I could change something in financial services it would be…Mifid II. The regulation is ridiculous. It is imposed by people who have not worked in the industry.
5 In my spare time…I spend time with my two young daughters. Once or twice a year we go to Montenegro, where we have properties that we rent out.
6 Do you invest in the fund? Yes. I put quite a lot of money into the L&G Alpha Trust and then into Special Situations, and I made a lot on those investments. I’ve now sold those holdings and put the money into this new fund.