TM CRUX European Special Situations: October 2022 fund update

How it fits in a portfolio

TM CRUX European Special Situations aims to grow investors' wealth over the long term by investing in European companies of all sizes, including higher risk small and medium sized ones. The fund also invests in a relatively small number of companies, meaning each investment could have a big impact on performance, which increases risk. This fund could be used to diversify the European part of an investment portfolio, or a broader global portfolio focused on long-term growth.

We removed the fund from the Wealth Shortlist in September 2022 due to concerns around the fund’s performance and investment process.

Manager

Richard Pease is an experienced investor and has invested in European companies for more than three decades. He ran the Jupiter European fund from 1987 and later joined Henderson in 2001 where he ran a number of European funds, including launching the European Special Situations Fund in 2009. He left in 2014 to help set up CRUX Asset Management and took the fund with him. It was renamed as the TM CRUX European Special Situations fund in June 2015.

Pease has the support of co-managers James Milne and Roland Grender, who help look for what they think are the best investment opportunities. Each member of the team brings a different skill set to the fund, which leads to a healthy dose of challenge and debate.

Process

Pease focuses on the prospects for individual companies, instead of wider economic events that are less likely to impact share prices over the long run. He tries to identify companies with certain characteristics or traits that offer the best long-term potential and breaks them down into four key pillars - business strategy, the quality of management, sound finances and attractive valuations.

Companies within these pillars should be able to generate strong cash flows, recurring revenues, and have little or no debt. He likes businesses that do something unique and offer a product or service that other businesses struggle to replicate or do better. They should also be run by a management team with a proven track record of running a successful business.

Some of these companies conduct business across the globe which means they're not only dependent on customers in the European countries they're based in. They also have the freedom to invest up to 20% in firms based outside of Europe.

While this approach has served Pease and his team well over the years, we feel there have been times they’ve deviated away from this process. Some investments haven’t been fully aligned with the ‘four pillars’ approach, leading to some unexpected businesses making their way into the portfolio. The team also remained invested in some companies where the investment case deteriorated. This has put pressure on the fund and detracted from performance.

Mistakes will be made through a manager’s tenure. Each manager on the fund has acknowledged some mistakes have been made and have taken action as a result. They’ve sold several companies, both European and non-European, in order to refocus on the core principles of their process. Alibaba, Just Eat Takeaway and Ams AG are some the companies the team have sold this year.

Culture

Pease is a founder and shareholder of CRUX Asset Management. Milne and Grender are also shareholders, which should ensure they want the best for both the business and investors. Part of their remuneration is also based on fund performance, so again they are focused on investor outcomes.

Recently CRUX hired Ewan Markson-Brown from Baillie Gifford to manage an Asian equity fund, which will broaden the firm’s capabilities. CRUX have also recently acquired a new shareholder from the US. A fund management business, run by the Stephens family, wanted to extend their arm into the UK and European space. They felt CRUX Asset Management were the ones who could help them achieve this goal. They’ve purchased roughly 20% of the shares, which will provide CRUX with an injection of capital to help expand the team further, bringing on aboard additional fund managers, like the hire of Markson-Brown.

ESG Integration

CRUX fund managers favour capital-light, well managed businesses, which often score well on ESG measures. The managers consider issues such as emissions, workforce relations, board independence and diversity but we feel their approach to ESG integration is not as comprehensive as some competitors. That said, it should be remembered that CRUX is a relatively small business, so doesn’t have the resources of some of its peers.

With regards to engagement, the managers meet company managers on a regular basis, providing feedback on matters such as strategy, dividend policy, balance sheet management and ESG factors. They’ve historically had active conversations with companies where they felt strongly about an issue. If they strongly disagree with the company’s actions, they will ultimately ‘vote with their feet’ and dispose of their shares.

The team votes on all resolutions, unless restricted from doing so. The firm points out confidence in the management team is a pre-requisite for investing, so rarely need to vote against them. A basic outline of the firm’s voting activity is available on their website and updated quarterly. However, there are no engagement or voting case studies, meaning CRUX offers far less transparency than most other fund groups.

Cost

This fund's annual ongoing fund charge is 0.83%, but after a 0.14% saving it's available at 0.69% through the HL platform. The saving is achieved through a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP. The HL platform fee of up to 0.45% per year also applies.

Please note the fund's charges can be taken from capital rather than income. This increases the yield but reduces the potential for capital growth.

Performance

Pease has a good long-term track record of investing in Europe. The fund has performed better than the European stock market since launch in 2009, though past performance shouldn’t be seen as a guide to the future.

Over recent years though, the fund’s performance has been lacklustre. The fund has lagged behind the IA Europe ex UK sector average and the FTSE World Europe ex UK index over the past six years. Remember, investments can go down as well as up in value, so you could get back less than you invest.

Our analysis shows this is partly a result of the managers’ stock selection - a key factor we analyse when assessing a fund manager, which shows their ability to pick strong performing companies regardless of what size or sector they’re in. In our view, the managers’ stock picking has been weaker than we expect and detracted from performance over this six year period.

The fund has also tended to hold up better than the stock market when it falls but lag a rapidly rising market. This has not been the case in recent years and overall, we have been disappointed with performance. Although Pease has built a successful record of investing in Europe, the fund’s performance has fallen outside of our expectations.

We’ve continued to speak with the team frequently about these concerns and they acknowledge some mistakes have been made. They’ve sold some of the companies they would not typically invest in and have sought to refocus on the core principles of their process. We want to monitor these changes, alongside the fund’s performance and let investors know if our views change.

The fund has struggled over the last 12 months falling 16.70%*, this compares to a return of -12.78% for the FTSE World Europe ex UK, and -16.59% for the IA Europe ex UK sector average. The fund’s investments in online food delivery company, Just Eat Takeaway, cloud technology provider SoftwareONE Holding and real estate company Aroundtown were among the worst performing companies over the period. That said, Pease has invested well in some sectors such as industrials and financials this year, with companies like Deutsche Boerse, a stock exchange, Bawag Group, an Austrian bank and Trelleborg, a manufacturer of polymer solutions, delivering good returns.

Past performance is not a guide to the future. Source: *Lipper IM to 30/09/2022.

Find out more about TM CRUX European Special Situations including charges

TM CRUX European Special Situations Key Investor Information