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Why Crux AM is in for the Penny

Why Crux AM is in for the Penny

A two-year hunt for a high quality UK equities manager finally bore fruit for Richard Pease’s boutique Crux Asset Management, which hired Legal & General Investment Management’s Richard Penny (pictured) earlier this month.

A long-term investment horizon and a bias towards value stocks is the approach that made Penny the perfect hire for the company, which had well-known ambitions to expand is fund range beyond the £1.2 billion European Special Solutions and European funds managed by Pease.

The firm settled on Penny because of his ‘exemplary skill’ managing mid and small cap UK equities according to Crux’s CEO Alistair Reid. 

But what makes Penny so special?

Tracking Penny’s performance

Penny, a Citywire +rated manager, has targeted unloved companies in his stock selection while running the £187 million L&G UK Alpha Trust. This approach helped the fund, which launched in 2005, to outperform the average manager in the sector by 162.6 percentage points on a cumulative basis since inception. However, the road to outperformance did have a rocky start.

Prior to joining LGIM in 2003, Penny worked at M&G where he managed a tech fund at the height of the dot com bubble. The bruising experience taught him the importance of value – a business doing poorly can be a good investment when bought cheap, but a good one can still underperform if you pay too much for it.

When he took over the L&G UK Alpha Trust in 2005, he put this new found zeal for out of favour small and mid cap stocks into action.

In the first year of its life, the fund failed to beat the average UK equity all companies manager’s return of 23%, after rising 13%.

The following year Penny's fortunes transformed, nearly doubling the sector average with a return of 36.8% on the fund. 

 

More recently, Penny’s contrarian views resulted in negative returns of 1.8% and 7.5% in 2014 and 2015 respectively, but overall investors who have stuck with him have been rewarded.

Over five years, the fund netted investors 79.5% on a cumulative basis, beating the sector average of 63.2%. Over 10 years the numbers are even more spectacular, with the fund returning 161.7%, almost double the sector average of 82%.

 

An interesting point in Penny’s career was in 2009, at the height of the financial crisis when the fund had its best year ever, netting brave investors 89% as many others retreated from the small and mid cap space.

Penny focused on finding UK companies that had significant overseas earnings, such as Immunodiagnostics – a company headquartered in the UK, but with a number of subsidiaries in the US, Germany, France, Denmark, Finland and Belgium.

Biggest loss

Penny’s biggest single loss was on an app developer called Globo that was the subject of an accounting scandal in October 2015.

At the time Penny had to write off a £2 million investment when shares in the company were suspended, describing the allegations against Globo as ‘the worst I have heard in 10 years’.

The company was accused of generating fictitious sales in a report by hedge fund Quintessential Capital, which shorted the stock.

Penny said at the time that ‘with hindsight’ it was the wrong investment to make, but it was difficult to account for the potential for fraud in investment decisions.

He invested around £5.3 million in the company at 15p per share in February 2011. With the shares having rallied to a peak of 83.4p in October 2013, Penny banked around £12.4 million since first investing, leaving him with a profit of around £7 million despite the write-off. 

 

 

Citywire comment

By Frank Talbot,

Head of investment research

 

Penny has made a name for himself by delivering excellent levels of outperformance over the long-term. While his longest standing vehicle, the Legal & General UK Alpha fund, is categorised as UK All Companies, make no mistake this is very much a small cap portfolio with eight of the top 10 holdings having a market cap of sub-£1 billion. With small caps as the reference, the tail end of the liquidity-driven market has not been easy for the manager with the fund rising 24.6% over the past four years, some way short of the FTSE Small Cap index’s 43.1% gain. This is the most protracted period of underperformance for the manager since he began managing the fund at launch in 2005. He has remained consistent to his style and Richard Pease knows a thing or two about a turnaround story.

 

 

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