After the dotcom bust and the global financial crisis, investors would’ve made a lot of money by buying growth companies at the bottom of these two recessions.
CRUX Asset Management’s Richard Penny, who benefited from doing exactly this after 1999 and 2009, sees a similar situation emerging today.
The manager of the £54m CRUX UK Special Situations fund said: “One of the things I do is look at the big technology trends.
“I'm constantly looking at things like artificial intelligence and gene therapy, just with this idea that I can find something in the UK that is exposed to those themes that can really provide explosive growth.
“There was an internet bubble in 2000 but I found a number of stocks that went up a long way. Then there was a similar theme coming out of the downturn in ’09 that we repeated.”
Towards the end of his tenure managing the L&G UK Special Situations Trust from 2014 to 2017, the fund was a top performer.
He attributed much of this performance to buying “interesting growth stocks” during 2008 and 2009 at the height of the recession and financial crisis.
“I had the confidence to do that because I did it in ’98 and ’99,” he said. “That is what we are seeing again today. Funnily enough we’ve had a good year by doing the same sort of things.”
The past year has seen CRUX UK Special Situations’ performance pick up dramatically, more than doubling in value.
Performance of fund over 1yr
Source: FE Analytics
Penny believes that as the UK emerges from its “pariah status” many company valuations will continue to do well with the momentum emerging as the economy recovers.
He argued that investors can find UK micro-cap names exposed to major growth themes that are much more attractively valued than their expensive peers in the US.
However, he cautioned just buying into a theme. While there could be a basic investment thesis or a story behind a company, investors must ask: ‘Is the company is well enough managed that it will genuinely deliver against some of its revenue and its commercial potential?’
“You've always got to marry the opportunity set up against the commercial maturity of it,” he said.
“I kind of worry that some of the ‘green agenda’ is inflating some share prices ahead of where the fundamentals should be at the minute.
“So 20 years ago, I ran an internet fund - and I'm only talking from experience here - but the internet has happened as we know, but the stock market got ahead of itself in 2000 and the time to buy was in the aftermath of the sell-off there.
“I think we have to be very careful about what we pay, and how mature businesses are.”
Penny said that one of the major themes he is still investing behind is Moore’s Law, which predicts the speed and capability of computers will increase every couple of years and be cheaper.
“The Web 2.0 and the FAANGs [trend] is going to move on into artificial intelligence, big data and the internet of things,” he explained.
“We are not going to find probably the next FAANGs in the UK, but we will try and find the same themes. It may be that we back a company that is £50m and it just may have the opportunity set that over a number of years could take several hundred million pounds.
“If you can put 1 or 2 per cent of the fund into it, you can create those returns that can be a really powerful driver, which is what we've seen before.”
His investment philosophy, however, is not just focused on pure growth. He explained that he is trying to invest where value and momentum coincide. “This is growth at a reasonable price, or value with a catalyst,” he said.
“We avoid very expensive growth stocks of which there are too many in the world at the minute, and we avoid value stocks that are cheap because they are a bit historic and you worry about their future.
“I will look in mid- and small-cap to find things that are trading a huge discount to mid- and large-cap or indeed the US market, and you can get involvement with the same drivers and themes at much cheaper prices.”
Penny’s basic premise is that it is difficult to find hugely mispriced opportunities amongst larger companies, but as you go into mid-, small- and micro-cap, there are far more chances to find them because they are less researched.
However, even in the large-cap space there are still what he labels ‘value with a catalyst’ opportunities.
Penny highlighted FTSE 100 giant Aviva, a value stock shunned by most of the market. He believes with its new CEO in place investing her own money into the firm, its retrenchment plans will release a lot of value to shareholders.
Whilst the Penny’s largest positions are in FTSE 100 giants such as Rio Tinto, Prudential and indeed Aviva, two-thirds of CRUX UK Special Situations is mid- and small-cap companies or even further down the market cap spectrum; 20 per cent of the fund is in stocks under £300m.
“A great performer for us has been Maxcyte which has tools for gene therapy,” Penny said. The company used to be under £300m but has now experienced tremendous growth over the last year.
Performance of Maxcyte over 1yr
Source: FE Analytics
“Gene therapy is one of the big exponential drivers that people in America get very excited about,” Penny said.
“Because we sequenced the human genome in 2000, now there's loads of pharmaceutical drugs to treat cancers and rare diseases coming through that these guys help people modify cells and put it into bodies.”
Despite the huge rally in the share price of Maxcyte, the manager believes that there is still more to come from the company.
He said: “Last month a significant cohort of US technology investors put money in at £7, so there's definitely demand for the shares - even though they've gone up a lot - by some very clued-in investors.”
Since inception in October 2018, CRUX UK Special Situations has delivered a 29.36 per cent compared to 6.47 per cent from the average fund in the IA UK All Companies sector.
Performance of fund versus sector since inception
Source: FE Analytics
It has an ongoing charges figure (OCF) of 0.83 per cent and currently yields 0.8 per cent.