Fund of the fortnight: Crux European Special Situations

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Written by: Jason Hollands, managing director of Tilney Bestinvest
26/06/2015
Tilney Bestinvest give their top fund pick for the fortnight.

Despite the daily diet of alarming headlines about the acrimonious negotiations between Greece’s far-left government and its creditors, and the looming prospect of the country defaulting on its debts, going bust and being ejected from the Eurozone, factors which have spooked the bond markets, European equity funds are very much in vogue at the moment. Indeed, the latest data from the Investment Association, the trade body for the fund management industry, revealed that in May the Europe ex UK and European Smaller Companies sectors took two of the top five positions for inflows from investors.

The popularity of funds investing in European shares is being driven by investors seeking to benefit from the European Central Bank’s massive Quantitative Easing programme which kicked off in March. Similar money printing programmes elsewhere have helped supercharge stock market returns as cheap money means companies can cut their borrowing costs and use the proceeds to buy back shares. And of course this massive European stimulus programme has come at a time when across the Atlantic the US Federal Reserve looks set to head in the opposite direction, having ended its own “Quantitative Easing” programme late last year and is now expected to start raising interest rates again, possibly this Autumn. Europe therefore looks a far more appealing investment prospect than America this year, where US shares are very expensive and could be vulnerable to a correction if the markets throw a tantrum over interest rate rises.

Europe is one of those sectors where there are some very strong funds to choose from including the likes of Threadneedle European Select, Henderson European Focus, Jupiter European and the more recently launched TM Sanditon European fund, all worth considering. But one name that few will be familiar with is Crux European Special Situations, as Crux Asset Management is a new kid on the block founded last year and currently this is its only fund. But the fund isn’t in fact a new launch that needs to prove itself before convincing investors, since it was previously the Henderson European Special Situations fund which, in an unusual deal, the manager of the fund, Richard Pease, was allowed to take with him when he parted company, amicably from Henderson to set up shop under the Crux banner.

Pease is to the Europe ex UK fund sector, what Neil Woodford is to the world of UK Equity Income – a manager with an incredibly long and proven record of managing money and delivering long term returns way ahead of the index, more than justifying the costs of an actively managed fund. A gift for finance must run in the Pease genes as his Quaker ancestors were among the founders of Barclays Bank and his sister, Nicola, has also had a successful fund management career. Richard first achieved prominence at Jupiter, when it was one of the fastest growing and exciting performance driven boutiques under the larger-than-life leadership of John Duffield. And following a spectacular bust up between Duffield and Jupiter’s then German owners, Pease moved to Duffield’s new venture New Star Asset Management, which in turn was scooped up by Henderson where alongside other funds, he managed this fund since its inception in 2009. Like Woodford, rather than resting on his laurels and serving out the remainder of his career basking in his past glory in the comfort of a large investment house, he’ has opted for the buzz of building a new business.

The fund management industry is notorious for the chopping and changing of fund managers and too often those heralded as “rising stars”, with a run of stellar performance, later on turn out to be merely “shooting stars” that eventually crash out of orbit. But in Richard Pease’s case, investors have the benefit of a visible performance track record managing European equity funds for more than twenty-five years, the longest of any manager operating in this sector. And the approach on the Crux European Special Situations fund remains completely unchanged from the process applied while Pease was at Henderson.

The investment approach is very much focused on stock picking individual companies rather than pursuing big picture macro-economic themes and there is no benchmarking of country weightings or owning large constituents of the index just because they are large – if you want that approach, go buy a low cost tracker instead. This fund offers genuine, unadulterated active fund management. Pease likes companies with quality management teams, strong balance sheets and ones which have high barriers to competition and strong pricing power as these types of companies have durable earnings throughout the economic cycle. Portfolio turnover is low – he is a long-term investor, not a manager on the look-out for short-term trading ideas. He also a has a slight value-style bias, avoiding companies trading on excessive multiples. The approach is therefore fundamentally conservative, but it has also has served investors well over the years with a very significant margin of outperformance. Over the last five years the fund has returned 74.1 per cent compared to a 45.7 per cent from the average fund in the IA Europe ex UK sector.

Although Continental European stock markets are his hunting ground, the companies he holds in his fund are often global in nature and therefore not reliant on the domestic economies of Europe recovering. One such example is a longstanding holding in Kone, a firm rooted in Finland, but the global leader in the manufacture of lifts and escalators. 41 per cent of Kone’s sales are in Asia and 17 per cent in the Americas- this is not a play on the health of the Finnish economy. Another major holding is Swiss-based healthcare giant Novartis which sells its products in 180 countries and generates 63 per cent of its revenues outside of Europe.

For investors looking to jump on board the European bandwagon with a seasoned manager and a conservative but successful approach, Crux European Special Situations is well worth considering.

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