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, Europe is falling off the radar a little bit because Brexit in the U.K. and the U.S elections across the pond have taken the headlines, but there is a lot going on across the continent. What are the things that we are concerned about? Is this sort of contagion with the movement in the U.S. and the U.K., this anti-politics politics, should we be concerned about the continent?
Pease: Well, I think one has to be a bit concerned. The Brexit might be the first of the dominos and certainly, as far as the U.S. elections, I think the market's concern is that if Trump should get in that he will be very protectionist. I'd like to think that obviously he has been successful from a business point of view and hopefully he won't do some of the things that he has promised if he actually gets in. I think he is not that stupid. So, I guess that it does concern the market but hopefully the worst won't come to pass.
From our point of view, as always, we try and focus on individual stocks rather than crystal ball gaze the and that does tend to add value and it does tend to protect us in terms of our sort of longer-term outlook.
Wall: I suppose the macro though does create opportunities for you to add positions that you do like. Markets across the board in Europe are down 2% today perhaps because of the concerns across the pond with Hillary Clinton's health and the likelihood of Trump getting into the White House. You say you don't make decisions based on the macro but presumably when there is a bit of volatility you can add to those positions you feel strong about.
Pease: Yes, we do. I mean, I think that's the exact way to put it. I mean, I think if you, kind of, follow stocks very closely, you are sufficiently confident to buy when the market is nervous and that definitely helps.
Wall: I suppose one of the other things that is a potential headwind for the European stock market is this Italian banking crisis. Those stocks in themselves fell but also the contagion risk across financials and indeed across other equities has had some effect, hasn't it?
Pease: Yeah, it has. I mean, I think if you look at it very simplistically, the Southern European economy has benefited the most with the European Union and low rates. And I guess, if you reverse that, they suffer the most and obviously, the banks are the ultimate leverage play on that. We aren't actually in Southern Europe particularly at all and we're certainly not in Southern European banks. But certainly, I think the market is probably quite right to be a bit concerned about that.
Wall: You do have some exposure to financials though, don't you?
Pease: Yes, we do. It's much more Scandinavian-based. We have three Scandinavian banks. I mean, that's a slightly special situations story where we feel the dividends are very likely to be paid with decent yields and decent management. So, it's not a global story.
Wall: And where are you seeing the best investment opportunities then? Is it very a case-by-case because the special situations nature of the fund or are there particular pockets because of the place in the cycle that we're at that you're seeing sort of thematic opportunities?
Pease: Well, I guess, what we tend to do is we look at stock-by-stock approach, but that very often ends up with us having a bit of a thematic idea or two. And one of the ideas would be I still think outsourcing. We've got quite a lot in caterers and that kind of thing. The attraction of that sector is that interestingly when the economy is trickier people are encouraged to outsource because it saves money. So you can see it's sort of easier to get business and there's lots of sort of self-help you can do.
And I think the other attraction with that kind of business model is that you have a lot of recurring revenue and certainty is obviously very much appreciated in uncertain times and you have negative working capital. And I think the very fact that these sorts of companies in quite a few cases have been through private equity and been very leveraged and now they are public and in most cases very deleveraged tells you that the business quality is actually very much there otherwise it couldn't got leveraged. So we do like some names there.
Wall: And over the last 12 months you've managed a 25% return to investors which is pretty good especially compared to some peers. The way that you're positioned over the last year, do you expect that to continue to deliver double-digit returns over the last year or was that a next year or was that sort of a unique 12 months?
Pease: I mean, I would be foolish to try and make a promise but I think – I mean, our approach has been pretty long term and so we don't tend to change the portfolio enormously. We've certainly made some changes and we've taken a few profits, but essentially the portfolio is pretty similar in terms of its sectoral principles and a lot of the same names there.
I think quite a lot of that 25% being frank about it is sterling's weakness. I mean, I guess sterling's recovered a bit, but it's probably 13%, 14% down against the euro. So we've had a big helping hand just in terms of currency there. I mean, I would hate to make silly promises about expected returns but I think that if people can mentally turn off that screen and actually invest rather than just speculate, I think certainly history would be on their side and I think certainly if you look at our strategies, it's been fairly consistent in terms of delivering over a three to five-year period. I would hate to make a short-term promise there.
Wall: Richard, thank you very much.
Pease: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
