Exposure to every major growth theme driving the US market is available on a cheaper valuation in the UK – as long as you are willing to look down the market cap scale. 
This is according to Richard Penny (pictured), manager of the TM Crux UK Special Situations fund.
Although the UK has yet to produce a tech mega cap to rival the FAANGs – Facebook, Apple, Amazon, Netflix and Alphabet (Google) – or a biotech sector on a scale of the US’s $500bn industry, Penny said it offers numerous small-cap names tapping into these high-growth themes – and unlike in the US, you don’t need to pay over the odds for the privilege.
The manager said the gene sequencing industry is a case in point.
“I followed the whole human endeavour of gene sequencing, which was very much hyped in 2000 and showed lots of promise,” he explained.
“Obviously, it always takes time to deliver these things. A huge amount of money in the US is going into the targeting of the immune system against cancer, the so-called ‘CAR-T’ programmes.
“Within the portfolio, we have 5 to 10 per cent in UK-listed healthcare stocks at a much later stage than the kind of things that people are throwing hundreds of millions of dollars at in the US.
“Companies that stand on their own two feet, are well-financed for the next couple years, growing revenues, but also trading at a real discount to what is there in the US. The US is so buoyant at the moment, whereas everyone has fallen totally out of love with the UK.”
Yet one area where Penny said the UK has fallen down is in the scaling up of these developments – which is why they are more prevalent at the small- and mid-cap level. He noted that while this country has always been a world leader in terms of academia, it has struggled to commercialise its scientific discoveries.
As an example, he pointed to portfolio holding MaxCyte – a US biotech company that is currently listed in the UK, but is likely to seek a place on Nasdaq next year.
“It needs to go to the US because in the UK, the whole drug process is about de-risking, people are very much, ‘what's the return on capital?’
“A focus for many is to get things at a later stage where you've got evidence of working partnerships from other big companies that have done due diligence.
“But this is a portfolio of about 120 participations in these CAR-T drugs, which are having a very real effect on cancer. It doesn’t own them, it has milestone participation where it gets up to $750m across these 120.
“That's incredibly valuable and it is growing all the time. When it lists on Nasdaq, which I expect to be next year, that should be very, very positive for the price.”
There are other reasons why the UK biotech sector is cheap – the all-or-nothing return profile of the very early-stage companies means even experienced investors have had their fingers burnt in the past few years – Neil Woodford being a notable example.
And, just like the wider UK market, it has suffered from the uncertainty related to Brexit. However, Penny said it is possible that Brexit may end up aiding this area in the long term.
“Regulation and constraints don't always help,” he explained. “I think the government needs to relax some of the pension rules as we need much deeper levels of funding.
“The fact most investors now are only investing in £500m-plus companies leads to some brilliant undervaluations. But it can make it difficult for companies to access funding.
“If they are then subsequently involved in a trade sale to America, I think that's a shame for the country. I think we need more financing, we need the government to do something.”
He added: “But this is a personal view rather than an investment view. My job is to make money for the investor.
“When these companies come along and they need more money – well, it's a buyer’s market, so we're in a good position to get them at very attractive prices.”
Like most funds focused on mid and small caps, TM Crux UK Special Situations has suffered this year, with a maximum drawdown of 46.57 per cent, although it has now halved these losses.
Performance of fund in 2020
Source: FE Analytics
But Penny is optimistic about the future.
“When the economy comes out of downturns, that can be really, really powerful for me,” he continued.
“I know it's a very long time ago, but 98 to 99 was a very strong time and so was 2009. And I see similar patterns. It's just the psychology of investors.
“Some of the smaller markets get left behind and the upside to those is not 30 per cent, it's not even 100 per cent, there can be increases of many multiples.
“A really difficult period in the market is out of the way with Brexit and Covid-19. We are not quite finished yet, but potentially there is really good upside.”
Data from FE Analytics shows the TM Crux UK Special Situations fund is down 14.05 per cent since launch in October 2018, compared with losses of 11.9 per cent from the FTSE All Share and 12.61 per cent from its IA UK All Companies sector.
Performance of fund vs sector and index since launch
Source: FE Analytics
The £34m fund has ongoing charges of 0.95 per cent.
During the 12 or so years Penny managed the L&G UK Alpha Trust, it made 319.2 per cent, compared with 163.6 per cent from the FTSE All Share and 161.96 per cent from its IA UK All Companies sector.