‘We buy unpopular stocks – then wait’

The L&G UK Alpha Trust has delivered its table-topping returns unevenly, providing tremendous growth in some years, then losing money the next. The fund suffered disappointing years in 2014 and 2015, losing 0.9pc and 6.7pc, respectively, after growth of 43.4pc in 2013, according to FE Trustnet, the data firm.

Following those recent losses, 2016 is looking like another bumper year. The fund has risen by 9.4pc in the year so far, the third best of any “UK all companies” fund. This performance has been delivered from a concentrated portfolio of shares selected from across the UK market, from very small companies to the largest.

The manager, Richard Penny, has a background running “recovery” stocks and stands to benefit from the increased appetite for these shares since the turn of the year.

His L&G fund, however, has more strings to its bow, as he explains.

How do you pick stocks for the fund?

The fund allows me to pick from any part of the market. The portfolio is very concentrated, with 40 to 45 stocks, and the top 20 account for about 80pc of the fund. The fund is very uncorrelated to the index. In general, we’re looking for stocks that can double their price in three years.

There are two types of holding in the fund. The first are “distressed equities”, which are recovery stocks that are out of favour with the market. We look for those that stand to benefit from some sort of change. They might need refinancing or be under new management or have a new product that can change their fortunes.

For example, oil and gas or mining stocks are potentially in this position. They have lacked investment. It’s an area I’ve been looking at, but have yet to find anything I like enough.

The second group is made up of strong growth stocks, where we target those we think can provide doubledigit sales growth.

This year has seen recovery stocks come back into fashion. Have you benefited?

That may be happening but actually our strong performance this year has come from some of our holdings becoming takeover targets. For example, Skyepharma, which is being bought by Vectura, is a big holding.

The recovery part of the fund does involve holding some “deep value” stocks that are unpopular and then waiting for their fortunes to turn. It can be uncomfortable, but the measure of any investment philosophy is whether you abandon it in the tough times.

I think some of the extra demand for undervalued parts of the market comes from merger and acquisition activity. Businesses have an appetite to buy competitors and are more able to do so because the corporate debt market is making it so cheap for them to raise money.

It’s an example of the bond market driving returns in the stock market.

Do you see a limit on how large the fund can become?

We find a lot of the opportunities among smaller companies, including some on the Alternative Investment Market (Aim). Given that I like to take big positions in the companies I buy, there may come a point when it becomes too big, but that might not be before £500m or £600m. The fund is currently at about £170m.

What recent additions have you made to the fund?

One is Tribal Group, which provides educational services, including software, to schools and universities. We like the new management there and have added it to the fund.

We also like Eclectic Bar, run by former Pizza Express boss Luke Johnson, which has just bought Brighton Pier. We think that deal makes sense and could creates some very attractive retail opportunities.

CMC Markets is a big position in the fund. It is financial spread betting and investing platform firm that is helped when there is volatility in the markets.

Do you invest your own money in the fund?

Yes, I hold meaningful amounts in both this fund and the L&G UK Special Situations Trust, which I also run.

What would you have done if you hadn’t become a fund manager?

My background was in software engineering, so maybe that. Or perhaps something in property.

L& G UK ALPHA TRUST

vs average UK fund over five years

Richard Penny of L&G UK Alpha owns ‘distressed’ shares as well as growth stocks, he tells Ed Monk

How to buy the fund as cheaply as possible

The trust has a total cost (the “OCF” or “TER”) of Be sure to buy the right “share class”, which is “I”. The investment shop through which you buy the fund will also levy a charge. Some will

0.88pc a year.

charge a percentage of the amount invested, others will apply a flat annual fee. Our colour coded tables at will guide you to the cheapest fund shop for your circumstances.

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