Get quality returns with FP CRUX European Special Situations

“We continue to believe that Europe looks more attractive than the US on valuation measures and with more stimulatory monetary policies likely to remain in place for some time,” explains Gavin Haynes, managing director at Whitechurch Securities. “On a corporate level, second-quarter earnings were strong and all sectors showed positive returns.”

One way to get exposure to European companies is via FP CRUX European Special Situations Fund (GB00BTJRQ064). The fund is run by veteran stock-picker Richard Pease, who has around 30 years’ experience investing in European equities. Over his career, Mr Pease has built a strong reputation and over 10 years he has delivered a cumulative performance of 152 per cent compared with 100 per cent by a composite of his peer group, according to FE Analytics.

Mr Pease and co-manager James Milne have run FP CRUX European Special Situations since October 2009. Over this period, the fund has outperformed both the Investment Association (IA) Europe excluding UK sector average and the FTSE World Europe excluding UK index. It has also beaten the sector average and index over three and five years, when it was among the top-performing European equity funds.

Despite focusing on special situations – companies whose valuation and growth potential provide a good entry point – the fund can make a good core holding in a portfolio. It provides broad European equity exposure in quality and vetted companies, investing in stocks of all sizes, with a slight mid-caps bias accounting for 45 per cent of the fund. It does not focus on any particular style, holding both growth and value companies, and allocates broadly across around 60 stocks. The top 10 holdings only account for around 30 per cent of the fund so it is not heavily concentrated.

The investee holdings tend to operate in sectors with high barriers to entry, that have strong pricing power, and should have earnings and share price growth potential. The duo avoid capital-intensive businesses, preferring companies with free cash flow and higher-than-average dividend yields. The managers have strict rules on valuations, and avoid stocks with a price-to-earnings ratio above 20.

While providing returns, these attributes can also be defensive and help the portfolio weather economic cycle downturns and market volatility better than more style-orientated funds, such as those investing primarily in growth or value stocks, or those taking more concentrated bets. It has a very attractive risk/reward profile with a three-year Sharpe ratio of 1.66. The Sharpe ratio measures how much return a fund generates for the amount of risk it takes, and any figure above one is a good score. 

The fund’s sector and geographic allocation tend to be formed by picking companies based on their individual merits, rather than any sector or regional views made by the managers. However, Germany makes up the largest geographic exposure, at 29 per cent of the portfolio and its largest sector is professional services, making up 21 per cent.

Recently, the managers said they were finding good valuation opportunities due to recent falls in some European stock markets. They recently topped up holdings in Kuehne & Nagel (Swi:KNIN), a Swiss global transport and logistics company, and Kone (Fin:KNEBV), an international engineering company based in Finland.

However, it is worth noting that the fund failed to beat the IA Europe ex UK sector average over one year. In addition, the managers' penchant for mid-caps could make returns more volatile over the short term. Also, if there were to be a downturn in Europe or globally, European equities would suffer, so investors should consider this if allocating to the fund, or region.

However, the fund’s good risk/reward profile and its manager track record suggests the duo often make the right calls over the long term. Its management team have had lots of experience navigating difficult markets.

So, if you’re looking for broad and long-term exposure to quality European companies, FP CRUX European Special Situations’ strong performance and experienced team make a good option. Buy. EA

Source: Morningstar as at 03/09/18, *Crux Asset Management as at 31/07/18

Performance

Source: FE Analytics as at 31/08/18

Top 10 holdings as at 31/07/18 (%)

Source: Crux Asset Management

Geographic breakdown as at 31/07/18 (%)

Source: Crux Asset Management