Catch up and a cuppa with…. Richard Penny

Thanks to continued Brexit uncertainty, the UK stock market is one of the most unloved in the world at the moment and it is trading very cheaply compared with its long term history. But, for FP CRUX UK Special Situations fund manager Richard Penny, that brings opportunities.

Richard joined CRUX Asset Management in June 2018 from Legal & General Investment Management, and this Elite Radar fund was subsequently launched in October 2018. It is run in a very similar way to the L&G UK Special Situations fund, which Richard ran successfully from 2014 to 2017 and, so far, so good: it is down 1%* since launch, while the average UK equity fund has lost 4%*.

As FP CRUX UK Special Situations approaches its first anniversary, we caught up with Richard to discuss his outlook and approach.

Is now a good time to invest in the UK stock market?

Analyst figures would show you the UK market is currently undervalued to the tune of 20-25%. The challenge is knowing whether now is an opportunity to invest, or whether there will be an even bigger opportunity around the corner. In terms of the portfolio we are a little more UK-focused than the market and we are more cyclical. We have tended not to buy companies like GlaxoSmithKline and AstraZeneca, which are in the more international and defensive FTSE 100, instead preferring to hunt among the mid and small-caps for our best ideas.

What is your definition of a ‘special situation’?

It normally means we look for special management, special business models and specifically undervalued companies as a result of an external situation or market situation. There are always hundreds of managers and institutions looking at the biggest companies, so it’s hard to add value in this space. That is why we only have 4-5 names from the FTSE 100, and they tend to be companies like Melrose, which has a fantastically aligned management team, and Prudential, which currently is in the midst of a break-up – which makes it a special situation.

Instead, we focus on medium and smaller-sized companies. We currently have 40% in the FTSE 250 and 30% in small-caps – the latter I think is the most contrarian market in the world right now. People are less focused on the small and micro-cap area, but there is value to be found there. And I do think there will be big opportunities in the micro-cap space when the downturn starts to unwind.

Which areas are looking particularly cheap at the moment?

The first areas that come to mind are oil & gas and mining. The trouble with them is they are tied to the ongoing trade discussions between the US and China. Then you have the banks and the life insurers. I think life insurers are cheap – now and relative to history – but if we crash out of Europe with no deal they will fall further. So I’m not rushing in to either at the moment.

I’m a contrarian growth investor. Instead I look at a group like Prudential, which despite being a UK life insurer, offers me Asian growth, and see the potential it can bring.

In the short-term, a prolonged downturn can be unnerving, but this is when the bargains can be found. And historically, my best performance has been coming out of downturns.

You currently have almost 7% in cash in your portfolio. Is that purely to tap into these bargains?

I think 7% is enough to tap into these opportunities. We’ve got liquidity in the top five names and we can make changes in any scenario. It’s important to have liquidity and flexibility in a small fund, particularly in a market which can change quickly – for example if the UK leaves Europe without a deal or trade wars between the US and China fully escalate.

*Source: FE Analytics, total returns in sterling, 1 October 2018 to 19 August 2019