IPOs have been few and far between this year, but there are two new investment trusts that are about to take advantage of the attractive opportunities in the UK.
Buffettology Smaller Companies is hoping to raise at least £100m to invest in UK small cap stocks with market valuations of between £20m and £500m. It will follow the same strategy as the successful £1.3bn UK Buffettology, an open-ended fund that targets larger businesses.
The sage of Omaha
The Chief Investment Officer of Sanford DeLand, the firm behind it, is Keith Ashworth-Lord who uses a similar methodology to Warren Buffett and licenses the use of the name from the family.
Ashworth-Lord invests with the premise that there is no philosophical distinction between part ownership and outright ownership of a business and that valuation is the key. It is then a case of looking for stocks with a competitive advantage that they can maintain in the future.
The companies he targets have an enduring franchise with pricing power and an economic moat to protect them. They also need to demonstrate the following: consistent operational performance with a proven business model; high returns on capital, strong free cash flow and a strong balance sheet; and management that are focused on delivering shareholder value.
The investment universe consists of about 600 stocks, of which around 200 meet their investment criteria. Once the valuation is factored in, the number drops down to roughly 30 to 50 and gives the fund a suitably concentrated portfolio.
Over the last five years, UK Buffettology has returned 76.1%, which puts it in second place in the giant UK All Companies sector and well ahead of the average return of 13.5%. A prospectus for the IPO is expected shortly.
Best of British
The other new launch is the Tellworth British Recovery & Growth Trust (LON:BRIT), which is seeking to raise £100m to £150m to invest in the “best of British” companies. These combine what the manager believes to be the best of British global leaders, British recovery plays and British technology stocks.
The management team will be led by Paul Marriage and John Warren, who worked together at Schroders where they generated strong outperformance on the firm’s UK Dynamic Smaller Companies fund before setting up Tellworth Investments in October 2017.
BRIT will have a relatively concentrated portfolio of 35 to 45 stocks that represent the Tellworth Investment team’s highest conviction ideas across the market capitalisation spectrum within the UK. The placing closes on October seventh with the shares expected to start trading on October thirteenth.
Marriage, Warren and the rest of their team are well known in the UK equities sector and have significant access to company management with the plan being to visit each potential investee business at least once before investing in it. These meetings are a key part of the investment process that relies on bottom up stock selection.
A lot of fund launches are designed to capitalise on areas of buoyant demand, but this is certainly not the case with these two IPOs as the UK stock market has been out of favour for years. Long-term investors will probably find this to be a good time to buy, although it is a moot point whether we actually need any new offerings given that we already have several hundred established options to choose from.