Richard Penny

In this paper we talk to Richard Penny of Legal and General Investment Management (LGIM). He manages their UK Alpha Trust Fund, UK Special Situations and various segregated mandates.

Many books have been written by ‘financial gurus’ which encourage the reader to believe that anyone can invest money (and make money). As an aftermath of the 2008 global crisis it was (possibly) easier than ever for investors to make money.

There is a strong argument that 2008 was a unique point in investment history where everything was so beaten up that to make money was very easy. Now as we return to a ‘new norm’ making money is much harder.

If we step away from the crowd, money can be made but like everything it is about identifying the right stock. Investing in Woolworths because it was cheap doesn’t necessarily bring success. As we have seen with the likes of Tesco’s there is much more to a stock than meets the eye and the reality is that for most people it is much easier to allow an expert to choose the investments.

This in itself brings challenges. How does an investor choose the right fund? Investment houses tend to promote their star funds, or last year’s success and for investors it is very easy to invest based on last year’s performance.

The danger of a star manager is all too apparent when that manager leaves because the fund is their fund and without them what happens?

At we catch up with some of the leading managers in the industry to understand how they approach investing. In this paper we talk to Richard who works for Legal and General Investment Managers. He manages their UK Alpha Trust Fund and UK Special Situations Fund. “Going back to a young Richard in your teenage years, did you always want to be a fund manager? If you did what route did you take and when did you first assume your first management role? If you didn’t why did you end up in fund management and again what route did you take and when did you first assume your first management role?”

I attended the local comprehensive school and was a bit of a computer geek in the earliest days of computers. Around that time the UK government began to privatise state-owned industries. Inspired by the ‘Tell Sid’ campaign for British Gas, which made it sound like free money to me, I took a series of odd jobs to buy my first shares.

At college I studied computer engineering and economics, but dropped engineering to focus on investing. I joined Scottish Amicable in September 1992, where I earned the nick name ‘Gumshoe’ as a result of digging the interesting notes out of other fund managers waste baskets. I was given a £100m Smaller Companies Trust to run within a year. “With nearly 20 years’ experience in the industry, what motivates you daily, yearly and for the long term?”

I love what I do and I invest my own money in the fund. I’m absorbed by the pursuit of finding the next winner. I love that no two days are the same and that we get to meet all sorts of senior people at the companies we invest in, but always with a view to making a profit for investors.

For example, I recently met the CEO and Financial Director of Shell following their recently announced deal with British Gas. We also get to meet with engineers and researchers at cutting edge technology companies in an attempt to find the ‘next big thing’ for the fund to invest in. “With nearly twenty years fund management experience you will have experienced the dotcom bubble, 9/11, global financial meltdown and near collapse of Europe (although this is not necessarily over). Going back over your career can you think of any major mistakes you made, what you have learnt and how has this been used to mould what you do today (and going forward)?”

I ran a technology fund which failed quite badly when the tech bubble burst in 2000-2001. I had benefited massively from buying cheap tech stocks from 1998 to 2000, but failed to sell enough of them when they became expensive and lost out.

This taught me the valuation of a share is at least as important as the investment proposition. In other words, a business doing poorly can be a good share if you buy it cheap, but a high performing company that everyone wants will still underperform as an investment if you pay too much for it. “How would you describe your style of management? The industry talks about value managers, growth managers, contrarians etc. For the average investor what does this mean? And how does your style make you stand out as different in the market?”

I look for stocks that can double over three years. I look for these across all sizes of businesses and they generally fit two styles:

  • Contrarian refinancing and recovery plays. We look for companies that we believe in, but are in financial straits and we can buy the shares at a discount to their core value. You could call this investing in companies that are in financial distress that we feel will recover strongly.
  • Attractively priced growth stocks. These may be technology or healthcare stocks, but not necessarily. I like to see strong profits driven by revenue growth that is underappreciated by the market, which means we can buy the shares cheaply enough and early enough to benefit from the growth. “Many commentators say that the global financial crisis was a unique event, and a game changer going forward, particularly as we don’t know the consequences of QE, how long we will remain in a low interest environment etc. If this is the case then everything we have learnt about investing goes out of the window because we just don’t know what will happen. There is also an argument that any manager could make money in the last five years, however going forward only the good managers will shine. What is your view, and do you feel you need to adapt your style to reflect this new environment?

I’m currently more concerned about bonds than equities! I find it extremely bizarre that people will currently invest in a government bond and receive no return. This is the real anomaly. This may be because people are very concerned about deflation. Interest rates may go up in the US in 2015, followed by the UK.

There are some worries about global growth and deflation, but the antidote to this is to buy those companies with pricing power (which drives profitability) and those that can grow. My favourite areas for such companies have been in the software and medical device markets. “For personal investors we have seen the collapse in share price of banks and now supermarkets, does this highlight that without the research it is much harder for them to invest directly in shares?”

Banks employ a lot of debt, and this raises the stakes when the economy slows. As a result, it seems like the banking system goes insolvent. Supermarkets did very well for a very long time at the expense of the corner shop, but eventually any market will suffer if too much capital is thrown at it. This is a normal lifecycle of a business or sector: expansion, maturity and then contraction. “There remains an argument that active fund managers particularly in the US rarely over the long term outperform the index. For personal investors looking at funds what do you feel they need to look at both from choosing active over passive, and more importantly looking at the investment style of an active manager?”

There are a few simple rules:

  • Invest in funds where the fund managers invest their own money
  • Prefer managers with concentrated portfolios
  • Look for a manager prepared to find value in under-researched, inefficiently priced shares “Connected with the question above. Some funds have become victims of their own success where the size of assets impact future returns. Do you believe size can be a problem or that a good manager can deliver consistent outperformance over the longer term irrespective of the size of their fund?”

Most fund managers have been adding value outside of the FTSE 20 for the last ten years. The FTSE 20 are the twenty biggest stocks that make up around 65% of the FTSE 100. As funds get bigger it’s more difficult to concentrate the fund on some of the smaller and better businesses out there. This inevitably reduces the potential for performance. “Shortermism remains a problem, investors want returns quickly and in reality they sell when the market is falling and buy when the market is rising. How long should investors look to hold investments and what would be your best tip to investing?”

I like smaller companies because they have consistently outperformed the UK stock market over the long term. However, these would not be appropriate for short-term investors. This is because smaller companies can sometimes go two or three years where performance is significantly lower than the main market. So it’s important for investors to seek advice from a qualified financial adviser who can help them match investments to their investment time horizon and risk profile. “Finally, with a crystal ball to the future (which of course we don’t have), what do you feel are the challenges facing investors, and in reality do you think these have changed or will change?”

I’d like to quote Warren Buffett here:

In the 20th Century, the United States endured two world wars and other traumatic and expensive military conflicts, the Depression, a dozen or so recessions and financial panics, oil shocks, a flu epidemic, and the resignation of a disgraced president. Yet the Dow [Jones Industrial Average] rose from 66 to 11,497. –Warren Buffett

It reminds us that the stock market is a long-term investment, however adverse conditions may be. To invest in the stock market is to invest in human ingenuity and this should be a very lucrative thing to do.

Give your money to a fund manager who is personally invested in their fund. Beware of buying a fund that is right at the top of the investment league tables since you may have already missed the boat. And remember to check that a fund’s manager has an appropriate record of success for the fund in question.

The UK Alpha Trust is only available through an adviser. For more information please contact your investment adviser.
The value of investments and any income from them may fall as well as rise, and investors may get back less than they invest.
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