Emma Wall: Hello and welcome to the Morningstar Series 'Why Should I Invest with You.' I'm Emma Wall and I'm joined today by Richard Pease, manager of the Crux European Special Situations Fund.
Hi, Richard.
Richard Pease: Hello.
Wall: So I think it's fair to say that you are feeling rather glass half full at the moment about the opportunities despite some of the scary headlines around?
Pease: Yeah, I think that's fair. I think understandably people can get very worried about some of these headlines, whether it's about Ukraine or geopolitical risks in Syria and everything else. And I think the natural thing to do is to try and hide. But I think what I would sort of say is, we're not going to pretend we are just domestic Europe, we're not. Most of our companies are very global and we think that's a good thing by the way.
But I think before one gets too frightened, I think what one should try and do is understand what's happened in the last seven or eight years, and we've had complete meltdown in '08, financially speaking. We had a terrible time for investors in '09. We've had all sorts of issues with emerging markets already, commodity prices, Ebola, wars, everything you could think of. And the some of the portfolio that we've got has handled this very well.
And actually, if you've held during that, you've made very good money. And I think if you go forward and you worry about China and what might happen in Russia and Brazil, in places, I don't see it as any worse than what we've been through, quite the reverse and the markets really come back. And that's a quite a useful opportunity as far as we're concerned, if you are going to invest, rather than just take a quick speculative part. So, we are actually if anything, quite encouraged by the opportunities.
Wall: You've mentioned there about investing rather than speculating and you said the phrase, 'if you held your nerve, you made money'. All of that seems to allude to the fact that these types of stocks are long-term holdings. You may well lose a year with all the sort of volatility and contagion around, but for the long-term these are bets that will outperform?
Pease: I wouldn't even use the word bets. I think they are great businesses with great cash flow characteristics with lots of recurring revenue, actually very under geared balance sheets, if we're going to get technical which allows all sorts of good things in terms of M&A to happen either be bought or buy, all of which were very accretive obviously for you as a shareholder.
I think that's right. I think people understand. They get say terrified that they are going to be made to look foolish over the next 10 minutes because they could have bought it more cheaply tomorrow or something. And again, I think it's important mentally to turn that screen off, and invest. So I think the alternatives are far worse. You get nothing with the bank. I do think there is a bit of a bubble seriously in the bottom market. And so I wouldn't be tempted by that. But these are companies which we think are on about 14 times earnings, that has taken the portfolio yielding between 3.25% and 3.5% with a very well covered dividend by the way, free cash flow yielding much more than that. As I said very under geared and they've done very well over the last 10, 15 years. So, it's not that terrifying if you put it like that.
Wall: I suppose the question is then, if they have very little debt and quite a bit of cash from the sound of things, that dividend is covered, what makes them special situations?
Pease: I think the word special situations just allows a bit more freedom and I'm afraid, we've obviously got certain things which I think could equal special situations, because that are slightly more involved. But really what we're trying to do here is find companies which actually can avoid some of the problems with regulatory issues and some of problems with having to invest lot of capital in difficult areas to get the growth and just stick to our mission, regardless of what the benchmark might or might not be telling us to do. So, it's about that. I'm afraid special situations can be almost anything and in this case it probably it does.
Wall: Richard, thank you very much.
Pease: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
