The CRUX of it

Newsletter | Q1 2017

If economics get ugly, politics are normally not far behind

Markets appear to be climbing a wall of worry, which makes sense as there’s certainly plenty to worry about right now

The CRUX of it

By Richard Pease

If economics get ugly, politics are normally not far behind – and that is exactly what has happened with ‘Brexit’ and Donald Trump’s surprise election as US president. Europe also faces a fresh period of uncertainty, following the Italian referendum result and the raft of elections coming up this year.

 

Clearly bonds have enjoyed an unprecedented thirty five year bull run with sovereign debt at their lowest ever yields. It is hard to argue anything other than this party now being over, especially if Trump is able to push through his reflationary policies.

 

European equities, on the other hand, look reasonably valued with our European Special Situations fund trading on an average price-to-earnings ratio of 16¾ on this year’s earnings, a healthy yield and has a net debt EBITDA of 1.5-1.6. This is a good starting point relative to bonds. This brings me on nicely to my New Year’s message - which is simply to invest, don’t speculate. There has been a shift out of the so-called ‘bond refugee’ stocks into lower quality companies, but this isn’t a trend that we expect will stay.

 

Even though politics are starting to turn ugly - don’t panic. Accept the bumps and take a three to five-year view on investments. There may be volatility along the way, but the direction of travel should be positive.

Over this period, you can benefit from the fear, enjoy a significant dividend yield and long-term growth prospects.

 

The CRUX of it

Newsletter | Q1 2017

Oriel Asset Management joins CRUX

We are delighted to announce the transfer of funds and employees of Oriel Asset Management to CRUX

Going for growth

By Alistair Reid, CEO

We are delighted to announce the transfer of funds and employees of Oriel Asset Management to CRUX. As a result, the investment manager of CFIC Oriel Global Fund, CFIC Oriel European Fund and CFIC Oriel UK Fund will change from Oriel to CRUX, subject to the necessary regulatory approvals, which are anticipated at the end of January 2017. The funds will be rebranded as CFIC CRUX Global Fund, CFIC CRUX European Fund and CFIC CRUX UK Fund.

 

Patrick Barton and Jamie Ward will continue to manage the CFIC CRUX UK Fund, while Richard Scrope will manage the CFIC CRUX Global Fund and the CFIC CRUX European Fund. The investment strategy of the funds will remain the same.

 

The funds are managed on a bottom-up basis and are unconstrained by benchmarks. They are characterised by a focus on long-term investment returns with an emphasis on risk management and capital preservation.

 

The CRUX European Special Situations and CRUX European funds will continue to be managed by Richard Pease and James Milne, supported by Roland Grender, and will see no changes to their process, philosophy or mandates. Further details on this transaction will be included in our next newsletter.

 

The CRUX of it

Newsletter | Q1 2017

Investing in cash-generative businesses

Managements with big stakes and longevity

Getting in early

By Richard Pease

We recently bought into Nordic technical service provider Bravida. It is a very well run business that has been through private equity - and they still have a 30% stake. We might be early with our timing on this, but we feel comfortable buying the company because it gives us that warm Ovaltine feeling when we go to sleep.

 

It is wonderfully cash-generative and we see that continuing. It can deleverage by completing small bolt-on acquisitions that are accretive and the good news is that its leverage is only around two times EBITDA as opposed to seven.

 

We see a lot of similarities with France-based Spie, not only in terms of its business model but also the fact that management have a big stake and have been there for a long time. Culturally they have got the right team.

The CRUX of it

Newsletter | Q1 2017

When does an acquisition make us nervous?

There are a

number of red flags that would make us feel nervous about a deal

When deals are dangerous

By Roland Grender

As many of you will know, we are long-term investors in companies that typically dominate their industries.

 

This means that they are often presented with opportunities to undertake acquisitions to grow their market share. The ultimate success of these deals can be determined by various factors, some of which are in the acquirer’s control and some aren’t. Nevertheless, from our experience there are a number of red flags that would make us feel nervous about a deal.

 

Here they are:

The valuation looks high

It is a totally new area for the company

The company operates in a part of the world where there are potential risks

If the company that is being acquired is from private equity, it may be under-invested

If the deal is unnecessarily funded with equity, given that it is relatively cheap to raise debt right now

The CRUX of it

Newsletter | Q1 2017

Separating the wheat

from the chaff

Brenntag has a

solid track record of completing low-risk value-accretive deals

The good, the bad and the ugly

By Roland Grender

Precision instrument group Spectris’ buy of vehicle testing ground Millbrook is a good example of a deal that caused alarm bells to ring for us. Firstly, there were no cost synergies between the two businesses and secondly it looked quite expensive at £122 million. We had already sold out of the stock before the acquisition was announced, so it simply reinforced our sell conviction.

 

Chemical distributor Brenntag, on the other hand, completed a number of small but helpful deals over the course of 2016.

 

Its latest is the planned buy of EPChem Group in Singapore, announced back in November. The company has a solid track record of completing low-risk value-accretive deals.

The CRUX of it

Newsletter | Q1 2017

The makings of a

successful CEO

CEOs must be good allocators of capital

By Roland Grender

In our opinion, a chief executive’s role is not primarily about getting into the nitty-gritty of the operating business. Of course, they should be on top of what is happening across the company, but we think it makes more sense for divisional or regional managers to take responsibility for this.

 

We like to see companies that have a decentralised decision-making process when it comes to operations because we think a chief executive’s central responsibility is capital allocation.

 

One of the characteristics that our most successful investments have in common is that their chief executives are good allocators of capital.

The CRUX of it

Newsletter | Q1 2017

Performance

Any investor who has done well year-to-date is likely to have performed badly over the past quarter. Unfortunately we sit in this camp of investors. There is perhaps some truth in Tall Poppy syndrome.

 

The shift into lower quality, cyclical stocks has affected our short-term performance, but we don’t view this as the start of a trend. It is also worth remembering that a lot of our companies will perform well if the sun shines. For example, Brenntag can benefit from higher GDP growth.

 

Nevertheless, we aren’t willing to bet on companies that are wholly dependent on economic recovery because that would be silly. It is akin to putting everything on black on the roulette table.

 

Although it has been a challenging few months, there have been a number of stand-out performers across the funds. These include Schneider, which specialises in energy management, forklift truck manufacturer Kion Group and specialty chemical company Sika.

CESSF      CEF

17.24 x

Average PE ratio

17.47 x

15.48 x

Average PE ratio for next year

16.21 x

1.58 x

Net debt Ebitda

0.94 x

The performance of our CRUX European Special Situations fund remains strong over one year, with a 19.7% return versus 12.1% by the average fund in the I.A. Europe ex-UK sector¹. Over 3 years, the fund has outpaced the sector average with a return of 36% versus 20.2%².

 

Meanwhile the CRUX European fund is up 16.7% since launch, which compares to 12.8% by the average fund in the I.A. Europe ex-UK sector³.

¹Source: FE, net income reinvested,  TR, I Acc GBP 30.11.15 - 30.11.16 ²Source: FE, net income reinvested,  TR, I Acc GBP 30.11.13 - 30.11.16

³Source: FE, net income reinvested,  TR, I Acc GBP 02.11.15 - 30.11.16

Note: Past performance is not a guide to future performance.

Source: as at 31 December 2016. © 2016 FE. All Rights Reserved, bid-bid UK sterling, net income reinvested.

Note: Past performance is not a guide to future performance.

Source: as at 31 December 2016. © 2016 FE. All Rights Reserved, bid-bid UK sterling, net income reinvested.

Important Information: The Henderson European Special Situations Fund was restructured into the FP CRUX European Special Situations Fund, an open-ended investment company (OEIC) on 8 June 2015. Any past performance or references to the period prior to 8 June 2015 relate to the Henderson European Special Situations Fund. This financial promotion is issued by CRUX Asset Management, who are authorised and regulated by the Financial Conduct Authority of 25 The North Colonnade, Canary Wharf, London E14 5HS. A free, English language copy of the full prospectus, the Key Investor Information Document and Supplementary Information Document for the fund, which should be read before investing, can be obtained from the CRUX website, www.cruxam.com or by calling us on 0800 304 7424. For your protection, calls may be monitored and recorded for training and quality assurance purposes.

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CESSF           CEF

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