Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Richard Pease. He is Manager of the Crux European Special Situations Fund. Hello.
Richard Pease: Hello.
Black: So, you've probably got a very difficult job at the moment. Tell me what is it like to be a fund manager in the middle of this pandemic.
Pease: Well, I'm sure it's an awful lot nicer than working in the NHS. So, we feel very lucky in that sense. But I think on a more serious note, what we try and do is to look through the crisis and try and see first of all in very basic terms which companies can hold their breath and for how long, and then, I suppose, looking further ahead, who can actually benefit from the crisis and take market share and also improve their business model going forwards.
I mean, it's quite easy to obviously get very depressed because you see all the nasty headlines. But I think we have to assume that humanity wins and then, basically at some stage we get back to some kind of normality. And so, if you do that, I think it's really a question of going through your companies quite carefully, speaking to management as often as you can and just doing some sanity checks and see where you are just generally. But I won't say it's business as usual, but essentially we try and do our best to make sure it's business as usual.
Black: And what are those interactions you're having with company management like at the moment? Do they seem quite worried? Or do they seem quite confident and have crisis plans in place?
Pease: Just in general terms, I've been quite pleasantly surprised. Because I think ones who rings up the ones where the stock prices have been hardest first and just to see if you can sort of tough base with what appears to be really going on rather than what the market thinks is going on. And certainly, I've had quite a number of conversations with those sorts of stocks. And on the whole, I mean, I think not that it's relevant, but the first quarter has been quite a good quarter. I mean, good companies tend to grow, and the first quarter was essentially a close quarter. And then, of course, Covid-19 hits you very hard this current quarter. I mean, no one is silly enough to pretend to be completely unaffected because everyone is affected to some extent. But I think there are plans in place. They are doing their very best to obviously cut costs, to save cash. And I think the positive from my point of view is, we're not aware of any stocks in our portfolio which actually need to have an embarrassing conversation with a bank or even worst have a very dilutive equity issue, which I think is a good sign for us.
Black: So, I know there is a lot going on in the short-term and a lot of uncertainty, but as a fund manager you have to try and keep an eye on the long-term. Do you think there are any changes you will see as a result of this or any things that you're thinking about for the future?
Pease: Well, I think, you can ask yourself some sort of – rather sort of fundamental questions about how consumers' behavior might change longer-term and if this is accelerated trends, I mean, if you obviously look at a tough area like bricks and mortar retail, clearly, that was in trouble before this crisis, it's obviously got worse as a result of this crisis. And so, death knell is near I'm afraid as far as that's concerned than one would have thought.
And then, I think, if you look a bit further ahead, you could possibly worry about inflation risk, if the governments are helicoptering money into the economy. I mean, that's certainly a possible concern. I think at the moment, that's a sort of lesser concern than just a bit of practical checks on what's going to happen in the next months. But if you take a three-year view, certainly, that's probably on their agenda to be looked at.
Black: And of course, you are a special situations manager, which means you've kind of got value focus and looking for maybe unloved companies. Is your job harder at a time when arguably most companies are pretty unloved?
Pease: Yes. Actually, funny enough, it has been quite an interesting mix, because the big sort of tech platforms have held up pretty well on the whole, certainly the U.S. big tech platforms and the Googles of this world. Certainly, some of the sort of loved growth stocks, so L'Oréals of this world have held up pretty well. I mean, I think the irony is that the long-term value, the stories for shareholders like the utilities and telcos, they've actually been refuge. So, in a way, they are not obviously cheap. And I think some of the stories which we like which have been hit quite hard for various reasons actually do look very interesting because they are good long-term stories. But the market has obviously been in a bit of a funk because of what's happened in the last couple of months. So, in a way, the valuation anomalies still are very much there, possibly more so than normal.
Black: Richard, thank you so much for your time. For Morningstar, I'm Holly Black.
