In January 2018, Crux Asset Management announced it had poached UK equity fund manager Mr Penny from Legal & General Investment Management, where he had spent the previous 15 years running two funds.
In the press release, Crux cited his “exemplary skill as a fund manager” and his expertise in managing mid and small-cap UK equities, which would “complement and strengthen our investment proposition”.
The L&G UK Alpha Trust, which Mr Penny managed from 2005, had been in the top quartile of the IA UK All Companies sector for performance from 2009 to 2011, he recalls.
Taking the plunge
But Mr Penny was leaving a well-established investment management company where he had built a track record, to join Crux Asset Management, which had been launched only four years earlier by European equity manager Richard Pease, formerly of Henderson Global Investors and New Star.
Why was it such a good idea to make the leap from an investment management behemoth to a much smaller boutique asset manager at this point in his career? Mr Penny says he had two reasons: “It was going incredibly well at Legal & General with the funds I was running.
Hopefully people will recognise that I’ve done quite well with a couple of funds and I’m really keen to do it again.Richard Penny“But I invested in small and mid-sized businesses – I quite like entrepreneurial businesses, I like it when fund managers invest in their own funds. It wasn’t entirely that sort of structure [at LGIM], even though they were very kind to me.
“If you wanted to set up your own business in today’s environment from a regulatory and compliance point of view it would be incredibly difficult. But Richard Pease happens to be pretty much the best investor in the UK – and the business is derisked from a financial point of view.”
He adds: “It was those two factors really. It was right for me, after being at Legal and General for 15 years.
“Hopefully people will recognise that I’ve done quite well with a couple of funds and I’m really keen to do it again. I’m still young enough that I want to put another 15 to 20 years on the board.”
Launching the fund
While Mr Penny started at Crux in June last year, it was only in October that he began investing his UK Special Situations fund.
His definition of a special situation is a company that is “properly undervalued, that will give us good upside”.
“We’re not different in that regard,” he admits. “However, let me just say how we build the fund.
“It’s concentrated, so we’re going to be between 30 and 60 holdings. We’re 40 [holdings] at the minute and it is high active share. It’s not just buying the top 10 stocks in the market.”
He says the fund predominantly invests in mid and small-cap stocks, with mid-caps currently accounting for 27 per cent to 30 per cent of the portfolio.
He refers to mid-caps as the “steady growth” stocks and the small-caps as the “attack”.
“Attack is stuff that’s very cheap, like recovery stocks, [and] refinancings. Or companies that can grow very strongly – so even in a difficult economy you get businesses that can benefit from trends that are going on,” he explains.
But when he started investing the fund back in October, he was “sitting on the fence a little bit” as Brexit continued to play out, and therefore had the fund positioned in more large-cap stocks.
Where he had 12 per cent in cash back in November, that has gone down to 9 per cent now.
“There was a little while where we were just looking at the market and edging the money in,” he says, acknowledging it has been “a very macro market” because of Brexit.
Investors might assume the research capabilities at Mr Penny’s disposal at Crux are not as broad as the research he had access to at LGIM. But he insists this is not the case and points out the active investment side “was really quite small” at LGIM.
Although the Crux UK fund run by Jamie Ward is more focused on banks, retail and consumer discretionary, he suggests it “is quite complementary with what I do”.
He also draws on ideas for his UK Special Situations fund from Mr Pease and James Milne who “run quite a lot of money in the UK as well, as part of their £1.8bn European Special Situations [fund]”.
It was while he was at M&G Investments that Mr Penny came to specialise in investing in recovery stocks, where he says he “did well with those, particularly in 1998, 2003 and 2008 to 2009”.
“Arguably, it’s quite a number of those recovery stocks that drove the [L&G UK] Alpha Trust,” he suggests.
What size would his new fund have to reach before he closed it to new investors? “I would say, the maximum size is £1.5bn to £2bn,” he confirms. “But from £500m we would be significantly less able to invest in businesses under £100m.
“Most people don’t invest in businesses under £100m at all, and I think if you manage it and you manage the liquidity, that’s where there are a lot of bargains.”
Ellie Duncan is features editor at FTAdviser and Financial Adviser
