Star European equity manager Richard Pease has unveiled plans to launch a new large-cap fund, aiming to replicate his past success on European growth portfolios while expecting to generate decent levels of income as a side aim. 
FE Alpha Manager Pease (pictured) left Henderson Global Investors in October 2014 to join the recently launched Crux Asset Management. A clause in his contract meant that he was able to take his Henderson European Special Situations fund with him.
Earlier this week, the firm announced that the FP Crux European fund will launch later this year, headed by Pease and co-manager James Milne with support from analyst Roland Grender. The fund will focus on large-caps, whereas the now-renamed FP Crux European Special Situations fund has more of a mid-cap bias.
Pease has a successful track record in managing European large-caps. Over his time on the Henderson European Growth fund, which spanned 2 July 2001 to his departure from the group, the portfolio posted a 181.60 per cent total return.
This put it in the top-decile of the IA Europe ex UK sector, where the average fund made just 87.15 per cent of this time; indeed, the fund was ranked fourth out of 51 for performance. It also outperformed its FTSE Europe ex UK benchmark by a significant margin.
Performance of fund vs sector and index over manager tenure
Source: FE Analytics
The new offering will make use of the investment approach that Pease and Milne have implemented in the past. This looks for companies that aren’t highly capital intensive but generate good cash flow; are in industries with high barriers to entry and strong pricing power; have management teams with proven track records; and are at relatively conservative valuations versus their peer group.
Around one-third of FP Crux European Special Situations is held in the large-cap part of the market, but the new FP Crux European fund is expected to have two-thirds dedicated to businesses with a market cap greater than €10bn.
Pease notes that there will be some overlaps between the two funds. FP Crux European Special Situations has 60 holdings while the new fund’s paper portfolio has 41 at the moment; 27 over these are in both funds but more than one-third of FP Crux European’s positions will be new ideas.
The manager says that the portfolio will have plenty of ‘big cash cows’ that have the potential to provide the desired growth while offering the added bonus of an attractive income stream.
“If you have a capital-light business model, you don’t need huge amounts of cap-ex to keep growing. There are a number of companies where we see almost no working capital requirements and that’s very helpful. People forget that growth can be expensive but we like those that can grow and not have to absorb a lot more capital – that means they can pay a dividend, do a share buyback or make an accretive acquisition,” he said.
“At the moment, I think we’ll be generating a yield of more than 3.5 per cent. If markets roar up, it might be a bit less. I think we will end up yielding more than some of the income funds, but I don’t want to be constrained by having to hit an official target.”
Two of the investments that the fund will make at launch are also found in FP Crux European Special Situations: Nordic financial services group Nordea Bank and Finnish financial company Sampo Group, whose fortunes are linked to a degree.
“Sampo has a great record. It’s a Scandinavian insurance company with a big stake in Nordea and yields about 5 per cent. It’s got every sort of hidden reserve you can think about and then some just for good luck. I like the fact that the guy who is now the chairman - Björn Wahlroos – actually started off life as an economics professor at Kellogg [School of Management]. If you meet the top management there, you’d buy the shares,” the manager said.
“Nordea Bank we just can’t resist – why wouldn’t you be interested in something giving you nearly a 7 per cent yield in a hard currency. That doesn’t sound too bad to me. And with Sampo breathing down their neck, there’s real pressure to perform.”
Pease also plans on taking exposure to Swiss pharmaceutical companies Roche and Novartis, which he notes have done “quite well” over recent years but argues there is still an interested story playing out. Further exposure to Switzerland will come from Zurich Insurance and SGS.
“I like SGS. It’s an inspection company based in Switzerland. It’s been hit quite hard because it has some exposure to commodities and oil but a lot of that is very everyday stuff,” he said.
“We like it because it has a very good balance sheet, is giving us a 4 per cent dividend and should resume its growth trajectory when things calm down a bit. In the meantime, we’re being paid to wait.”
The above point highlights that the new fund is being launched into a rather turbulent market. While European indices were hit by the Greek debt crisis earlier in the year, they have also had to contend with non-domestic issues such as fears over slowing Chinese growth and the prospect of interest rate rises in the US and the UK.
Performance of indices over 2015
Source: FE Analytics
However, Pease is sanguine about this and even says that in a sense he is “delighted” to be able to start a portfolio at a time when assets are cheaper than they were.
“Funnily enough, I’m feel quite encouraged by the fact that some of the froth has been knocked off the market. We don’t see the current challenges in the same way as you would the financial crisis: it’s a different story. We like the fact the market is being indiscriminate,” he said.
“People are so terrified of investing then finding out they could have invested a little more cheaply a week later. I understand that we all want to get bargains and worry that the market is going to be more difficult for the next few months – but in a way I hope it is because it means we can buy more cheaply.”
FP Crux European will open its two-week offer period on 12 October before going live on 2 November. It will carry an annual management fee of 0.75 per cent.
Charles Younes, fund analyst at FE Research, notes that Pease has established a strong track record on the back of his process and says the fund could be interesting for investors who do not want a great deal of exposure to the domestic European economy, as the manager’s preferred companies tend to have an international focus.
“This fund is essentially Crux’s version of the Henderson European Growth fund, which Pease previously ran with good results. The manager’s past performance has been supported by strong stock selection in mid-caps, so it’s reassuring to see that the new fund will have around a third of its portfolio in this part of the market,” he added.
“The income element of the launch is also interesting, although the manager has made clear this is no way binding. Given the fact that the process leads Pease to businesses that generate a lot of cash and have scope to return it to shareholders, this additional aim of the fund looks to be achievable.”
Tilney Bestinvest’s Jason Hollands adds that FP Crux European is “certainly worth serious consideration”, given the manager’s long-term record in European equities.
“We are currently positive on European equities, so it is potentially an attractive time for a very experienced manager to be starting a portfolio with a clean sheet of paper, unencumbered by legacy positions,” he said.
“That aside, on balance though I prefer the mandate of the existing Crux European Special Situations fund which has significantly exposure to mid-caps and smaller companies, whereas the new fund will be focused on large caps.”
Performance of fund over manager tenure
Source: FE Analytics
As the graph above shows, FP Crux European Special Situations also has a strong track record over Pease’s time running the portfolio at New Star, Henderson and Crux. Its 74.77 per cent total return since October 2009 puts it in the first decile of the sector, while it is also top decile when it comes to metrics such as alpha generation, Sharpe ratio and annualised volatility.