Richard Penny’s new venture at Crux is a punchy offering, illustrated perfectly by his backing of a company that he “lost a lot of money on” while at Legal & General.
The £10 million Crux UK Special Situations fund, launched on 1 October, will be run in a similar way to his L&G fund – high conviction, long term and with a decent exposure to small caps.
Some of his former investments make appearance in his new venture, notably a tiny AIM-listed company called Mercantile Ports & Logistics (MPL).
At £8.5 million market capitalisation, it’s a pretty punch call from Penny. “It’s not for widows and orphans,” he says, “but this is a Special Situations fund and it is in a portfolio that is diversified.”
Mercantile is an India-focused logistics company, which boasts on its website of having “delivered several ground-breaking, mega infrastructure projects”. These include India’s first ever private sector port and logistics facility, the first private sector railway line and the first private expressway.
Today, its operations are focused around the Karanja Port near Mumbai, which it says is a key gateway to trade for eight land-locked states in India. Going forward, it looks to identify other suitable locations to bolster its portfolio of ports and logistics facilities.
But it’s had a chequered past. It floated back in October 2010 at 250p, and Penny invested in it during its early history. But its share price chart since IPO is scary viewing.
Soon after beginning to build the port, the project saw hit regulatory issues, explains Penny. Those delayed the project substantially, and the share price fell dramatically.
Two years ago, Mercantile raised £36 million by issuing new shares priced at just 10p. It came back to the market for more cash earlier this month, placing shares at just 2p.
This round has been well backed by institutions, with the likes of Legal & General, M&G, Schroders and Miton, who combined own half of the business, continuing to back the firm.
Penny says that’s given him confidence, as has the strength of the management team and board of directors. “We take assurance from that, for all that this is a minority sport – Indian assets on AIM in the UK – and it’s as contrarian as you’d like,” he continues.
Penny has invested 40% of the portfolio in FTSE 100 companies and a third in small caps. The rest is in FTSE 250 names, with around 10% in cash. Currently, he’s underweight mid caps due to valuations in that area.
AIM Stocks
Nine of the fund's top 10 holdings are FTSE 350 listed, but its third-largest investment is the £20 million AIM-listed Hydrodec (HYR). The company processes used and contaminated waste oil to produce, market and distribute transformer oil and naphthenic base oil.
It is another company that has seen its share price plunge to a level where it needed to place new shares in order to raise cash at 75p. There’s plenty of upside, says Penny.
The firm has strong intellectual property and if it can increase its prices there’s potential for margins to double over the next couple of years. “There’s lots of reasons to be optimistic," says Penny. "You’re getting into something that’s potentially very interesting at a low price.”
He also likes companies aimed at software-as-a-service, which he says hold up very well in recessions. “I just think they’re really nice growth businesses. Cloud services is a growth area and there aren’t many big players there.” He’s playing this theme through Cloudcall (CALL) and Smartspace (SMRT).
Instem (INS) is another software business, which is a play on the growth of compliance as a theme. The firm helps to file drug registrations into digital format. “I’ve known it for seven or eight years and it’s always promised lots. It’s in a place now where demand is taking off.”
Large Caps
Management is a key pillar of the investment case for many of Penny's companies. One he is backing to continue to deliver is the team behind Melrose (MRO), which buys businesses and turns them around before selling.
They recently acquired aerospace components company GKN, a deal some brokers were sceptical of, due to the exposure to the troubled automotive sector. “But I just think you back the management team there,” says Penny. They have been very clear on their plans for GKN – improving the bits they like and selling the rest.
“When you have this kind of market people get worried about the macro rather than the micro,” he adds. “From the macro point of view, you look at Melrose and see lots of headwinds, but if you look at the micro and the people, you buy it. That’s where we’d be different from other people.”
British American Tobacco (BATS) is another firm with some risk, with the impact of regulation as yet unknown. “You wonder should you just throw in the towel, but directors seem to think not,” says Penny. Management have recently been buying the stock on weakness, too.
A couple of miners also feature, with Centamin (CEY) and Rio Tinto (RIO) in the top 10. The latter is dependent on the iron ore price, but is a low-cost producer and generates plenty of cash.
Penny says Centamin has a world-class asset but has struggled to get the right quantity of gold out of the ground. It has plenty of cash on the balance sheet, but has seen the share price decline by a third in the year-to-date.
“I’m not a gold bug but some people are, and in a world that can be quite difficult at times it can be a totally uncorrelated asset at times. It’s a recovery play, as well, which is good.”
Areas Penny is steering clear of include housebuilders, retailers and banks. On the latter, he says he would generally buy the mid-level banks, because their asset books are easier to understand. “I don’t think there’s any distress in them at all yet.”
Overall, the fund is slightly overweight UK earnings, but the large caps give an element of overseas earnings, “to counteract the more domestic-focused small caps, and a bit of yield”.
