The brains behind two of the best performing UK equity funds in recent years is to launch its first investment trust, targeting smaller companies that look cheap and which have the right characteristics to grow for many years to come.

Sanford DeLand-run Buffettology Smaller Companies Investment Trust is seeking to raise at least £100 million with its IPO offer open to both retail and institutional investors, ahead of joining the stock market at the end of October. The annual management charge will be 0.65%.

Keith Ashworth-Lord, Sanford DeLand chief investment officer and one of the managers of the new product, says he has never had so many messages from institutional and private investors and other contacts as when the trust launch was announced on 25 September, implying considerable interest in the forthcoming IPO.

GOOD TRACK RECORD

It’s easy to see why people are excited. Sanford DeLand’s CFP SDL UK Buffettology Fund (BF0LDZ3) has achieved 26% total return over the past three years and its Free Spirit Fund (BYYQC27) has achieved a 38.8% total return over the same period, both top quartile performances according to FE Fundinfo.

Buffettology Small Companies will follow the same investment process as these funds, a strategy heavily influenced by legendary investor Warren Buffett.

Sanford DeLand likes to invest in companies whose share can be bought at a fair price versus the estimated intrinsic value of the business. Its process involves identifying companies which tick the following boxes:

– Easily understood business model

– Transparent financial statements

– Consistent operational performance with relatively predictable earnings

– High returns on capital employed

– Convert a high proportion of earnings into free cash

– Strong balance sheet and low financial leverage

– Management focused on delivering shareholder value and is candid with the owners of the business

– Preference for organic growth over ‘frenetic’ acquisitions

30-BAGGER

‘We find great businesses and get in early doors,’ says Ashworth-Lord, revealing a preference to hold on to winning stocks for as long as possible.

‘We’ve had tremendous success with some holdings. Bioventix (BVXP:AIM) has been an eight-bagger for us,’ he says, meaning he’s made eight times the original investment. ‘AB Dynamics (ABDP:AIM) has been a 10-bagger and Games Workshop (GAW) is now a 30-bagger for us.’

CFP SDL UK Buffettology Fund and Free Spirit Fund can invest in large, medium and smaller-sized companies with Free Spirit having a slight bias towards technology firms.

REASON FOR LAUNCHING NEW TRUST

Ashworth-Lord says the £1.3 billion CFP SDL UK Buffettology Fund has become too big to invest in micro-cap stocks, hence the launch of the investment trust to mop up opportunities in that space.

The asset manager runs concentrated portfolios so CFP SDL UK Buffettology Fund would run the risk of having to own a large chunk of a company if it were to invest in the micro-cap space, which has happened in the past and something Ashworth-Lord wants to avoid again.

‘Eighteen months ago, we held three micro-caps in the open-ended Buffettology fund, being Air Partner (AIR), Revolution Bars (RBG:AIM) and Driver (DRV:AIM). We ended up owning 15% to 20% of each business which was too much, so we took the decision to divest of all micro-cap holdings.’

PORTFOLIO POSSIBILITIES

The new investment trust will focus exclusively on the £20 million to £500 market cap space at the time of the original stake purchase, and purely on UK-listed stocks.

Ashworth-Lord declined to reveal any names under consideration for the investment trust’s portfolio. He would only say that it would be at least 70% different to CFP SDL UK Buffettology Fund and Free Spirit Fund.

‘I have 11 companies on a notepad where we will do some work now, deciding if the investment is “go or no go”. (Analysts) Eric Burns has a similar number and David Beggs has three ideas, but one is already too big,’ explains Ashworth-Lord.

‘Seven companies feature in both the CFP SDL UK Buffettology Fund and Free Spirit Fund portfolios which is a 15% overlap, down from 30% before Andrew Vaughan started running the latter fund (in 2019).’

He says all three portfolios will be relatively uncorrelated so people could use both open-ended funds and the investment trust if they wanted and not really double up on positions.

UK GOING CHEAP

Sanford DeLand’s new product will be the third trust trying to float in the coming weeks aimed at exploiting opportunities in the UK market, alongside Tellworth British Recovery & Growth Trust and Schroders British Opportunities Trust.

All three see an opportunity to pick up good businesses at discounted prices. ‘Small companies are really out of favour and stock market valuations in the UK are lower than the US and Europe because of Covid and Brexit.

‘In reality there are still good companies doing well, such as Focusrite (TUNE:AIM) which has sailed through the pandemic. Those types of business will find their way into our investment trust,’ says Ashworth-Lord.

Shares recently interviewed Andrew Vaughan, manager of Free Spirit Fund, in the Money & Markets podcast. Listen to that interview to find out the secret of his success.

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