Best in Class: TM Crux UK Special Situations

Unloved and underappreciated – that has been the general consensus for UK equities for a number of years.

Brexit and the weakness of the pound hang over the economy.

There are also some structural issues which have resulted in the market’s underperformance. For example, compared with the global markets, the UK is underweight technology and overweight energy – not the best combination in 2020.

The UK has not seen the same bounce as other global markets since the sell-off earlier this year

But what could turn our fortunes around? Talk of a value or macro rally being the catalyst has been touted. It has also been considered that perhaps the market has simply been too cheap for too long.

Certainly, the UK has not seen the same bounce as other global markets since the sell-off earlier this year, but could the recent vaccine-bounce and potential progress on Brexit be the start of a brighter 2021?

If so, the UK may well be the market to cash in on and this week’s Best in Class is managed by someone with a proven record of being a talented UK stock picker.

The TM CRUX UK Special Situations fund is managed by Richard Penny.

Mr Penny launched this fund in October 2018, having joined the employee-owned firm from L&G, where he ran a similar vehicle during his 15-year stint at the asset manager.

Mr Penny invests in UK companies of all sizes but will typically have more of a focus on medium and smaller companies when building a portfolio of around 40 stocks.

He likes to find a bargain and, over his career, has proven himself very adept at doing so.

He looks for high quality businesses with low levels of debt. He likes them to be run by strong management teams and for the business to have an economic advantage and the potential for high returns on capital and growth.

He uses his stock-picking skills to find under-the-radar or undervalued companies with the ability to grow more than market expectations or recover from recent setbacks.

So companies tend to fall into two categories: rising stars and fallen angels. Rising stars are quality companies that are growing and have high returns on cash. He reviews them to create a short-list of businesses that are cheap.

These can be small or medium-sized businesses that, although established, their strengths have not yet been recognised in their share price. Fallen angels are the very cheapest shares in the market: the big price fallers and recovery companies, where there is hidden value and discarded quality.

Given the unprecedented volatility we have seen in markets in 2020, Mr Penny has recently been targeting investments in the financials and cyclical sectors, as well as smaller companies.

He believes all three are among the hardest hit and will provide the best returns from a future recovery.

Mr Penny sees around 250 companies a year – some of which he has seen regularly over the 20-25 years he has managed money.

Top holdings currently include the likes of Rio Tinto, Prudential and Brewin Dolphin. Since launch the fund has returned 6.9 per cent compared with -3 per cent for the IA UK All Companies sector average. The fund has an ongoing charge of 0.86 per cent.

Mr Penny has managed money through many different market scenarios and this experience helps him to look past the obvious and identify the real source of a company's success. We believe this fund is well-positioned to take advantage as and when the UK comes back into vogue.

Darius McDermott is managing director of FundCalibre