Our stockmarket has lagged behind the US and other rivals as they bounced off the coronavirus crash lows, but three new investment trusts are about to go hunting for the best ‘unloved’ British companies.
The British Recovery & Growth trust will be managed by Paul Marriage and John Warren, of Tellworth Investments and opened its initial public offering on 16 September, intending to raise up to £100million by 5 October.
Its investment objective is to generate long-term total returns over a rolling five-year period by investing in and supporting UK stock market-listed companies and promoting UK technology and innovation.
The new trusts all intend to invest in UK stocks, which they feel have been unloved for too long while some hope to find unique opportunities among the chaos left by the Covid-19 pandemic
Meanwhile, Sanford DeLand, the firm behind the top-performing £1.3billion UK Buffettology fund, is launching the UK Buffettology Smaller Companies investment trust.
It is also seeking to raise a minimum of £100million and will adopt a long-term investment horizon of at least five to 10 years.
Schroders has launched the British Opportunities trust, which aims to raise £250million via its initial public offering.
It hopes to invest in the ‘future of British business’ in both the public and private space, while supporting UK employment throughout the pandemic and beyond.
Rory Bateman, head of equities and Tim Creed, head of UK and European private equity, will be lead managers of the Schroders trust, and also focus on sustainable and ethical investing.
With the future so uncertain for British business, not just due to coronavirus but also a potential no-deal end to the Brexit transition, why are the trusts launching?
‘In the aftermath of Brexit and Covid-19, UK equities are currently undervalued,’ said Marriage.
Tellworth’s Paul Marriage will manage the British Recovery & Growth trust
‘Low interest rates, structural changes to industry profit outlooks and a volatile political and economic backdrop have also driven significant valuation dispersion which presents an opportunity for stock-pickers.
‘We wouldn’t say the launch is a direct response to the coronavirus pandemic or a single development alone, but more a result of the huge opportunity to capitalise on attractive valuations and to support businesses and the economy through the recovery.
‘We are also responding to client demand to create an investment which resonates with the idea of “we’re in it together” in delivering the UK’s recovery.’
UK Buffettology Smaller Companies investment trust manager, Keith Ashworth-Lord, said they had been working on a UK smaller companies offering since the start of the year and before the worst of the pandemic hit the uK.
‘The trust has been in the works since January as the growth of UK Buffettology meant small and micro-cap companies were no longer accessible though we were still seeing many opportunities,’ he said.
‘That reason for launching stands now more than ever as the UK market has fallen out of favour. I can’t remember valuations between Wall Street and London being so different.
‘The UK is a great place to invest but it is being shunned. I think the doom and gloom is overdone.’
Bateman, lead manager on the Schroders offering, said: ‘This is a once-in-a-generation opportunity to invest in the future of British business and produce substantial returns while making a positive impact.’
How do they compare?
While the trusts appear to have the same intentions – to find opportunities in the undervalued UK economy – their methods of going about it differ greatly.
Tellworth, for example, will split its British Recovery & Growth trust portfolio into three distinct ‘pillars’: British leaders, British technology and British recovery.
Marriage said: ‘We believe together, these pillars will create an “all-weather” fund for the long-term. The portfolio will also be highly concentrated with around 35 to 45 stocks across the market cap spectrum.’
The first pillar focuses on British companies at the top of their game with a strong global market position and consistently high returns, such as drinks manufacturer Fever Tree.
The second pillar is made up of companies the team thinks are ‘materially undervalued’ and have the potential to show significant recovery, such as pub chain Wetherspoons.
Finally, British Technology will target businesses with high levels of intellectual property and a large addressable market, like video game company Codemasters.
Marriage added: ‘This sector has its own pillar because we believe the UK has a thriving technology market supported by a highly skilled workforce, particularly at the small and mid-cap end, which offers investors different opportunities to that of tech giants seen in the US and China.
‘Our investment universe is focused on companies that responsibly employ a significant proportion of their workforce in the UK, and we will not be investing in any internationally headquartered firms listed in the UK.’
|Company||Trust||Listing||Issue price||Target issue size||Benchmark||Number of holdings||Annual management charge|
|Sanford DeLand Asset Management||UK Buffettology Smaller Companies investment trust||London Stock Exchange||£1 per share||£100m plus||Numis Smaller Companies plus AIM (ex-Investment Trusts)||30 to 50||0.65%|
|Schroder Investment Management||Schroder British Opportunities trust||London Stock Exchange||Not available at this stage||£250m||Not available at this stage||30 to 50||0.60%|
|Tellworth Investments||Tellworth British Recovery & Growth trust||London Stock Exchange||£1 per share||£100m||The trust does not seek to track any benchmark||35 to 45||Between 0.60% and 0.65%|
|Source: Tellworth/Schroders/Sanford Deland as at 28/09/2020|
Buffettology: There are fewer people fishing in that part of the pond
UK Buffettology Smaller Companies on the other hand, will take a completely different approach by investing in purely small and micro-cap companies.
Inspired by the investing philosophy and methods of Warren Buffett – and having licensed the name from the investment guru – Keith Ashworth-Lord’s Buffettology approach has already handsomely paid off for investors.
The UK Buffettology fund boasts an exceptional track record, outperforming most of its peers over one, three and five years. Since it launched in 2011, it has returned 230 per cent, compared to just 56 per cent for the IA UK All Companies sector average.
However, its success and growth means it can no longer access small and micro-cap companies, which is where the managers started seeing all kinds of opportunities. This realisation plus a steer from clients led to the the new smaller companies offering.
The UK Buffettology fund boasts an exceptional track record, outperforming its sector average over one, three and five years, and more than four times since its launch in 2011
Ashworth-Lord said: ‘The reality is that the UK is a great place to invest for growing businesses – there is a great entrepreneurial spirit.
‘There is a lack of research on small companies these days, which is wonderful for us as we do our own research.
‘We’ve also done an analysis of what UK small-cap trusts are out there already and 53 per cent of invested businesses in their portfolios have a market cap of at least £500million. They are not concentrated like we are.
‘There are fewer people fishing in that part of the pond so more for us to bite on.’
Investing in private companies and ESG
Schroders’ British Opportunities trust will also take a different approach in that its the only one of the three trusts to invest in private companies in addition to those that are listed.
It is also the only one in with active ESG-focus and aims to promote a long-term focus on sustainability from its holdings by encouraging them to incorporate the UN Sustainable Development Goals into their business planning, and to adopt best ESG practices and disciplined capital allocation.
Fund manager Bateman said: ‘We will engage with companies to facilitate growth through fresh equity and undertake an in-depth assessment of company ESG credentials.
‘We will look to improve awareness, behaviour and disclosure of environmental, social and governance factors.
‘Meanwhile, the current level of UK government debt-driven support is unsustainable and as support comes to an end, we believe many high-quality UK growth businesses will require an injection of fresh equity to grow and succeed through the pandemic and beyond.’
Why launch trust now?
Investment trust analysts at Numis said it is interesting to see so many equity investment companies seeking to launch as IPO’s for equity strategies have been few and far between over recent years.
Ewan Lovett-Turner, director of investment companies research, said: ‘There were none launched in 2019, and just Nippon Active Value has launched in 2020.
‘We believe the number of equity trusts being marketed may reflect an increased focus on liquidity of holdings within open-ended funds by investment managers, leading them to look at closed-ended funds.
‘These are seen as a better home for less liquid strategies, such as small-caps.’