Launched last month by CRUX Asset Management, the FP CRUX UK Special Situations Fund (BG5Q5X2) is managed by seasoned investor Richard Penny.

In a coup for the firm, this summer Penny joined CRUX from Legal & General Investment Management (LGIM).

At LGIM, he’d built a reputation for stock picking prowess via his stewardship of L&G UK Alpha (B079QX4) and L&G UK Special Situations (B3DMY34) trust, both of
which consistently outperformed the market.

Shares regards the new fund as a compelling proposition, enabling investors to buy into the fund while it is still small and capture Penny’s future market outperformance.

PROVEN PROWESS

The affable Penny has more than 25 years’ experience in the UK market and has racked up over 5,000 company meetings in his time, garnering invaluable experience in ways to spot the winners and stay away from stock market duds.

‘We’ve got a clean sheet of paper,’ says Penny, whose new OEIC will seek to deliver long-term capital growth from a high conviction, concentrated portfolio of UK stocks, with some exposure to other developed markets.

Armed with a disciplined, research-driven process, Penny will seek to generate alpha by focusing on mid and small cap special situations, stocks which may be out of favour, or where he perceives there to be hidden value.

Not dissimilar to his previous L&G UK Alpha Trust, this concentrated, ‘best ideas’ portfolio will have greater scope to invest in smaller companies but it is an all cap book; the manager will invest roughly one-third of the portfolio in FTSE 100 companies, one-third in mid-sized stocks and one-third in smaller companies.

Mid caps will form its solid core, but importantly, the new fund also has the ability to invest in AIM, with the fund’s exposure to the junior exchange capped at 30%.

Penny will also consider the FTSE 100 as well and has the flexibility to be up to 20% non-UK listed, giving him the freedom to play themes and opportunities which aren’t available in the UK.

Talking to Shares about the new launch, Penny was unable to discuss specific names, although he did point out that Dublin-headquartered duo DCC (DCC), a support services concern, and construction materials outfit CRH (CRH), are in the FTSE 100 yet are technically classified as non-UK.

Penny will focus on fundamentals to identify high quality businesses with low levels of debt, run by strong management teams and where the company has an economic advantage with the potential for high returns on capital and growth.

He will also use his considerable stock picking nous to focus on companies that compete on a global scale and with a specific eye on business to business companies, many of which served him well during his stint at LGIM.

‘This is a concentrated stock picker’s fund,’ enthuses Penny, explaining he’ll look to unearth both value situations and growth situations, with areas such as oil and gas services, mining and even retail currently piquing his interest.

Patience will be a core component of the approach and the fund, in which debut dealings began last week (1 Oct), will not invest in companies which are unproven or where Penny deems it too early
to invest.

Red flags for Penny include ‘complex accounting, people who capitalise R&D, if the cash is not in place that’s a problem, and I don’t like acquisitive companies if the management doesn’t improve the businesses they acquire.’

Penny is also mindful of the well-worn adage that profit warnings come in threes, so don’t expect to see him jumping into a recovery stock after the first or second profit warning.

WHY THE UK IS OK

‘People are underweight the UK, but the FAANGs are looking really expensive,’ explains Penny, who focuses on the fundamentals of businesses to ensure they can deliver healthy upside, ‘but in the UK market you can find some really interesting growth stories.’

Penny also believes some of the best opportunities can be found lower down the market cap scale, especially since international investors have a focus on UK mega cap companies.

‘There are some quite interesting large caps that are yielding circa 5% and I’m seeing opportunities in some sub-£200m-to-£300m market caps,’ Penny informs Shares.

‘There’s definitely a lot of opportunity in the UK small cap market, but we are pretty selective,’ stresses Penny, who may back recovery stocks ‘where new management has put in a few thousand pounds. But we want to back businesses that have a viable future. We don’t want recovery stocks that are businesses in decline.’

Significantly, Penny is ‘eating his own cooking’ to coin a phrase, having put a considerable amount of his own money into the new fund to ensure alignment with investors.

As he commented at launch: ‘I have invested in UK stocks for many years and have always believed that good businesses only make the right investments when they are bought at the right price.

‘Now is the ideal time to be bringing this new offering to investors as the UK remains out of favour and the uncertain environment creates numerous attractive opportunities for experienced stock-pickers. It is very exciting to be joining such a talented team and to be a part of this growing business.’

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