Renn Universal thinking larger

Renn Universal Growth has traditionally invested in micro caps, companies with entrepreneurial CEOs who are major investors. Now they are moving up, investing in larger companies

FS Beth Brearley 160 byline

Russell Cleveland, manager of the Renn Universal Growth Investment Trust, has been moving up the market-cap scale through investing in larger companies.

The £32m trust, which launched in 1996, has traditionally invested in US and Canadian micro stocks; those with a market cap of less than $1bn.

However recently Cleveland has been buying into companies such as gadget-protection company ZAGG, USANA Health Sciences, Titan Machinery and DXP Enterprises to increase the trust’s liquidity.

“We have recently bought million dollar positions in founder-owner companies which are very liquid. These are companies with major people at the top,” Cleveland says.

Cleveland and his team have also created their own index, currently labeled the Renn Founder Owner index, which lists over 300 companies across the market-cap spectrum.

“Over 10 years, the S&P 500 is up 53 per cent, the Russell 2000 is up 83 per cent, and the Renn Founder Owners index is up 228 per cent. In recent years, investors would have been better off in the mid cap founder owner companies. Over 10 years, the mid caps are up 338 per cent, while the small caps are up 145 per cent,” he says.

Founder-owner companies are at the heart of what the trust is about, as Cleveland mainly invests in companies with entrepreneurial CEOs who are major investors in their companies. Indeed, 80 per cent of the portfolio is invested in founder-owner companies.

Another recent purchase is Flamel Technologies, a 5 per cent position. “Flamel is a drug delivery company which has a lot of exciting things in the pipeline over the next couple of years,” he says. “It has benefited from the US Food and Drug Administration mandating the slow delivery of drugs such as OxyContin.”

Cleveland has also been adding to Bovie Medical Corporation, a manufacturer of digital electrosurgical equipment, and currently holds about 7 per cent in the company.

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“Bovie has launched the new J-Plasma system and the results have been very good,” Cleveland says. “It is new technology which cauterises tissue to stop bleeding. Surgeons like it as in most surgery there is a need to control bleeding, so it is of major importance. We have got quite a bit in Bovie and we are adding to it. It will be an acquisition candidate at some point.”

Meanwhile sales include PHC, a behavioural health services company which was acquired by Acadia Healthcare in the fourth quarter last year.

Earlier this year, the trust moved to a net cash position for the first time since it was launched following a series of mergers, acquisitions and sales.

The fund has since reduced cash from 15 per cent cash to 10 per cent, following the board’s decision to buy back shares at a discount, which it continues to do. The move saw the discount shrink from 30 per cent to 20 per cent.

“I would like there to be no discount,” Cleveland says, “but I think 10 per cent is reasonable. It is a real bargain for investors to have exposure to AnchorFree.”

AnchorFree, an online security application, is the trust’s largest holding, representing one third of the portfolio. Earlier this year, Renn Universal sold a stake in AnchorFree for $5.3m after Goldman Sachs invested $52m in the company, but the trust still holds 84 per cent of the original stock.

“AnchorFree has had 700 million page views this year, and 100 million people are now using the application each month,” Cleveland says. “It is a very profitable company. It still has the money from Goldman Sachs in the bank and is continuing to grow. The CEO and co-founder David Gorodyansky wants to create a company in the billions. We would like to take profit in the next couple of years, but not now as the company is just exploding. In two to three years, it could be worth considerably more.”

One of the holdings which has not fared so well is Cover-All Technologies, a technology software provider for the property and casualty insurance industry, which represents 11 per cent of the portfolio.

“Cover-All has been the biggest challenge in the portfolio this year,” Cleveland says. “All of the volatility in the trust’s NAV has been in Cover-All stock. They are still optimistic but the market is sceptical. Cover-All deals with major insurance companies, and has multi-million dollar contracts. But because of all of the bureaucracy it takes forever to close a contract. They have made projections for big gains in sales this year, and are working very hard to get a record year. They would be an excellent acquisition, so we will hold onto the stock for now.”

Over the year to 1 November, the trust is up 22.97 per cent against the AIC North American Smaller Companies sector average of 20.77 per cent, according to Morningstar.