Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
Flying the flag for best-in-class UK companies
The UK market remains unloved with many investors believing it to be full of old economy businesses and lacking growth. While that criticism is fair on a select basis, applying such an opinion to the whole of the market would mean missing out on some good companies.
Asset manager Tellworth is hoping to convince investors that the UK is still full of money-making opportunities with the launch in late September of a new investment trust.
Tellworth British Recovery & Growth Trust will invest in large, mid and small cap stocks which are either UK businesses and global leaders in their respective niche, good British businesses on distressed valuations because of Covid-19, or British companies with promising technology.
The idea is to have a blend of these three groups and adjust weightings depending on what’s happening in the market and with valuations.
The British global leader segment of the portfolio is likely to contain names one might associate with funds and investment trusts that have a quality tilt, such as Smithson (SSON) and Finsbury Growth & Income (FGT).
UK companies seen as being big players in their respective industries around the world include precision engineer Renishaw (RSW), tonic water specialist Fevertree Drinks (FEVR:AIM) and credit checking group Experian (EXPN).
Among the stocks likely to appear in the British recovery element of the portfolio is tenpin bowling centre operator Hollywood Bowl (BOWL).
‘There are some really good quality domestic businesses out there but clearly in a tough place at the moment as a lot of them haven’t been able to trade,’ says Tellworth co-founder John Warren, who will be one of the managers on the new trust.
‘We think Hollywood Bowl is one of the best-run fantastic return on invested capital leisure businesses out there, but it hasn’t been able to open a bowling alley for six months.’
The British tech stocks segment is likely to be the smallest component of the portfolio, predominantly targeting smaller stocks on the market as the UK isn’t known for having lots of large cap tech names.
‘Where we see ourselves being really able to excel in tech is in finding younger technology businesses,’ comments Warren. ‘The UK is good at getting tech businesses to come to the public markets rather than staying private. We don’t see ourselves getting involved in unquoted businesses in the first 12 to 18 months of the trust’s life, but we are able to do so and won’t rule it out.’
WHY MULTIPLE SEGMENTS?
One might question why Tellworth is spreading itself across three different segments of the market rather than having a tight focus on just one area. It’s down to a desire to blend investment styles.
‘That goes back to the big argument in stock markets this year which is value versus growth,’ says Paul Marriage, also co-founder of Tellworth and co-manager of the trust. ‘We could build a portfolio that is entirely global leaders and it would be familiar to other funds out there with a growth-biased strategy.
‘But if value becomes more liked, we would be left exposed. The recovering Britain component gives us the value balance we have in our other fund portfolios.’
Warren says the purpose of the trust is to back good businesses and be there to support them on future fundraisings and support their growth. In turn the trust would be doing its bit to aid companies that are positively contributing to the UK economy as well as businesses that are flying the flag for Britain as a source of corporate excellence.
The desire to include some high-quality businesses with a global presence ultimately means Tellworth will have to consider paying up for stocks as many in this category trade on high earnings multiples. Warren admits that the market is still happy to pay any price to access growth companies, so Tellworth paying up for a few highly valued, high quality names ‘is the right thing to do’.
When there are signs that growth stocks are losing favour, the investment trust will consider increasing its weighting to value names.
‘More recovery-type businesses are likely to be in the consumer-facing industries where there has been a huge disruption. Earnings might be depressed but the market does have some really good names,’ says Warren.
‘We want to make a good return for shareholders – it might be too early to buy into some of the recovery businesses so we can have more money in the companies still producing growth and whom can hopefully still employ lots of people in the UK and grow that employment. Over time as the UK and global economy starts to recover, we will probably want more risk and move into more recovery-type stocks.’
ASSET MANAGER RESOURCES
Warren and Marriage set up Tellworth in 2017, having both moved across from Schroders. They’ve subsequently hired three other fund managers and an analyst, giving them expertise across big and small company investments and these individuals will provide support for the new trust.
Tellworth has developed a product called ‘UK economic thermostat’ which is an economic model based on alternative data. The managers think it will give them an investing edge. ‘It gives us three to six-month lead indicators on lots of parts of the UK economy which will hopefully help us make the best decision as when to move some of the money into more of the recovery stocks,’ says Warren.
They also use an investment process called ‘P3M’, which seeks to encompass the characteristics desired in a company and stands for ‘product, market, margin and management’. To pass the test, businesses need to have a differentiated product, market leadership of a niche, the ability to grow margins and generate cash, and management who own stock and understand shareholder value.
‘If you find those things, usually that’s a pretty good place to start in terms of making money,’ says Marriage.
FILLING A MARKET GAP
Tellworth aims to raise at least £100 million from the IPO (initial public offering) offer which includes the ability for retail investors to get involved via some of the mainstream investment platforms.
The investment trust will have a concentrated portfolio of 35 to 45 stocks and charge 0.65% a year up to £150 million market cap, and 0.6% thereafter, based on market value rather than net asset value.
Marriage says investment trusts already exist to play themes such as US technology, but there isn’t anything to play a UK recovery and back the UK at the same time. Therefore, he believes the Tellworth British Recovery & Growth Trust will fill a market gap.
A renewed focus on Brexit trade talks may cause some choppiness in UK stocks near-term, yet the Tellworth team don’t seem overly worried. They insist a trade deal doesn’t need to be done before they start buying UK domestic stocks as they will be taking a three to five-year view on a business.
‘If we get a deal just after this investment trust launches, it would be fortuitously fantastic timing,’ says Marriage. ‘If we get more noise, we would be buying a falling market. The timing is hard work. I think no deal, no free trade agreement, full fallout is unlikely. After Covid, I don’t think any government is going to sign up to that.’
DISCLAIMER: The author owns shares in Smithson referenced in this article