While it might seem a curious time to be launching a UK equities trust as the market continues to be battered by Covid-19 and Brexit uncertainty, Tellworth Investors’ Paul Marriage thinks that there are real opportunities for investors.
The Tellworth British Recovery & Growth Trust will be managed by FE fundinfo Alpha Managers Paul Marriage and John Warren, and Johnnie Smith with an investment thesis centred upon supporting the 'best of British' companies.
In a climate of low interest rates, structural changes to industry and a volatile political and economic backdrop, international investors have deserted the UK. But, according to Marriage (pictured), this presents an ideal opportunity for stockpickers. 
“Brexit and the Covid-19 pandemic are causing fundamental shifts in the UK economy and markets across the globe,” he said.
“We strongly believe in the long-term future of the UK and that its flexible economy and focus on innovation will pave the way for an array of exciting investment opportunities at attractive valuations.”
The team will aim to generate long-term total returns over a rolling five-year period from a concentrated portfolio of 35-40 stocks, representing their highest conviction ideas from across the UK market.
And to find the “best of British” companies, the trust will focus on three key pillars.
The first pillar consists of ‘British Global Leaders’, defined as companies with differentiated products, which have strong global market positions and generate consistently high returns.
The second pillar, ‘British Recovery’, is made up of companies that are materially undervalued and looked poised to make a significant recovery.
Finally, ‘British Technology’ aims to target companies with high levels of intellectual property across a large addressable market.
Constructing a portfolio should be straightforward given the experience of veteran investors Marriage and Warren, but there will be some restrictions on what they can invest in.
“There are no stocks under £25m market cap, so that still gives a big universe of around 1,300 companies across the UK market,” Marriage explained. “We have nothing in gas and mining, it’s high risk and requires considerable sector expertise.
“Likewise, there is nothing in biotech. The science behind new drugs is highly complicated and it really is for specialist investors.
“However, we do like medtech, as it licenses products with revenues and the technology is proven so we’re much more comfortable with that.”
Once the pool is narrowed there are various quantitative screens and accounting for levels of corporate governance. And from there the three pillars start to take shape.
Portfolio construction
Source: Tellworth British Recovery & Growth Trust
From the outset, the pillar split will be 40/40/20, with ‘British Technology’ accounting for the smaller section. This pillar will identify small- and mid-cap stocks across a whole range of technologies.
Tellworth’s Marriage explained that the ‘British Global Leaders’ pillar aims to identify those UK-based leaders in small market niches.
Companies fitting into the ‘British Global Leaders’ portion of the portfolio include autonomous vehicle business AB Dynamics and drinks manufacturer, Fever-Tree, which Marriage said is expanding successfully into the US market.
The Tellworth British Recovery & Growth Trust is equally as focused on recovery stocks and the second pillar is aims to find those undervalued UK companies which have been badly hit over the last six months.
“Demand has gone away, share prices have been hit pretty hard and supply is restructuring,” he said. “The survivor companies on the other side of this when demand comes back, we believe will be the winners.
“Companies with strong fundamentals, great products, and in an industry which has gone through a tough year has also led to some of the weaker players dropping out.”
However, some positive news on the EU trade talks front or on Covid-19 could change the outlook for these stocks, said the manager.
“If we feel that the recovery opportunity is suddenly a lot better – maybe Brexit negotiations are heading towards a deal – clearly that trade will come on quicker,” he explained.
“If we emerge through this period of circuit breaking restrictions with Covid under control, then the stock market will get excited about consumer-facing stocks again, that will help recovery.
Yet, Marriage warned that value investing in the UK is not without its challenges.
“I’m conscious that there are value traps out there, but within the context of those 1,300 stocks a lot of them are seriously undervalued,” he said.
“To look below the surface and determine what’s cheap and how cheap is it compared to global markets, and how cheap are those companies compared to others in the UK and abroad.”
The trust is aiming to raise up to £100m via an initial issue of ordinary shares with flexibility to raise up to £500m should there be greater demand.
Performance of fund vs sector & benchmark since launch
Source: FE Analytics
Marriage and Warren manage the small-cap focused TM Tellworth UK Smaller Companies fund together, which has made a 1.09 per cent total return since launch in November 2018 compared with a 4.47 per cent gain for the average IA UK Smaller Companies peer and a 0.15 per cent return for the Numis Smaller Companies plus AIM index.