Crux’s Penny points to opportunities in UK small caps

Crux’s Penny points to opportunities in UK small caps

Regulation such as the Markets in Financial Instruments Directive (MiFID) have helped to make UK small caps better investments, according to Richard Penny, fund manager at Crux Asset Management.

Mr Penny, who walked away from running a pair of long established UK funds at Legal and General to start again at Crux, said his new fund, Crux UK Special Situations, would focus on shares with a market cap of between £100m and £300m.

He said the shares of companies at this point of the market cap scale had become more attractive since the Mifid II rules were introduced.

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Those rules forbid investment fund managers from accepting research notes from brokers for free, which means  less information is known in the market about those companies, leading to more scope for shares to be mispriced, said Mr Penny.

He said the rules will also mean more funds in the IA UK All Companies sector will invest in larger companies, making it more difficult to find shares that are cheap relative to their underlying prospects.

Mr Penny said for most of his career he has invested with a focus on small and mid cap companies, and that it was only in his latter years at Legal and General that he found himself investing more in large caps.

He said his new fund would continue to own some large caps which he believed would help balance out volatility.

Mr Penny ran the Legal and General UK Special Situations fund and the Legal And General Alpha Trust, prior to exiting the business at the start of 2018.

He uses the value style of investing, which has been less successful than the growth style favoured by other managers.

Mr Penny said statistical evidence pointed to value style investing working over the longer term, and to small caps beating large caps.

But fund manager Nick Train has previously said technological change meant the traditional value versus growth debate was no longer relevant in the 21st century.

Mr Penny said he is generally avoiding UK retail and consumer shares during the present period of uncertainty.

Fraser Mackersie, who runs the £85m Unicorn UK Growth fund, said worries about the UK stock market generally related to the economic performance of the country, but companies could grow regardless of the performance of the wider economy, particularly in the technology area.

David Scott, an adviser at Andrews Gwynne in Leeds, said Richard Penny’s funds tended to perform best when markets are rising.

He praised the fund manager’s long-term track record and said: "If you like the UK market, then Richard Penny is one of the best fund managers to have on your side."