Sheridan Admans explains why he is investing into Crux UK Special Situations fund in the TC Share Centre Multi Manager Balanced & Adventurous funds and the reasons behind that decision.
Introducing Crux UK Special Situations to our funds
Richard Penny is a UK asset manager that has proved in his tenure at L&G that he has what matters and the expertise for investing in mid and small cap equities.
It is hard to ignore the Brexit debate, UK politics in general and the impact this has had on the country’s position on the world stage. This has seen sentiment towards investing in UK equities sink with outflows from active UK managers reaching into billions over the course of the last few years. The UK has become the most unloved developed market to invest in. Sentiment towards the UK has got so bad that I am now of the view that the upside potential outweighs the downside risks.
Yes, Brexit is likely to continue to be a drag on investor confidence in the interim but the economic situation has been better and more resilient than many expected, the wheels haven’t come off! Indeed, in the Spring Statement the chancellor raised the UK growth forecast to 1.5% up from 1.4%, borrowing expectations were revised down and a small current surplus is expected in 2018/19. A surplus which should leave some room to borrow to fund capital investment rather than meet day to day spending needs. All the while, the forward P/E on the All Share index is around 13 to 14 times earnings well below the long-run average and rates are still likely to remain below historical norms for some time to come.
In addition, not all UK companies are domestically focused. Investing in UK companies provides investors with great exposure to overseas opportunities; the FTSE 100 for example generates around 75% of its revenues from overseas operations. Current valuations also make the UK a ripe hunting ground for overseas predators. The mid-cap, FTSE 250 over the longer-term provides better growth opportunities and not only gives investors great exposure to the domestic economy but like the FTSE 100 generates a significant proportion of its revenues from overseas, approximately 50%. My point is that UK investing can still give investors a significant exposure to overseas opportunities.
So while the underdog, in this case the UK economy is not likely to grow as fast as other economies in the near future it is still expected to grow and be pulled up by the rest of the world. Unlike some other economies equity markets UK valuations look a lot less toppy at this stage in the cycle. Given the competing factors, as laid out above, at this point in time, active management should have an edge, in the right hands, over a passive approach.
Mifid II has also been having an impact on asset managers with many cutting their research budgets to focus on more large liquid companies. While this has meant a pullback in coverage in small and mid-cap stocks, this should benefit Richard who is adept at picking winners that are under-researched.
Richard’s approach to investing has a value bias to seeking out businesses that are under-researched and under-priced, that are in recovery mode, which may have valuation anomalies or previously fallen short of expectations. Richard seeks to identify a catalyst or some meaningful exogenous event that may cause the market to revaluate the fundamentals of a company, whether that be from refinancing, M&A activity, secular growth opportunities or event driven strategies. All which I believe provide ideal characteristics for picking winners in this market.
All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.