Fund manager profile: Crux AM’s Pease and Milne on the Oriel acquisition

It’s been over a year and a half since Richard Pease and James Milne left Henderson Global Investors to set up investment boutique Crux Asset Management.

The duo manages the £1.2bn European Special Situations fund, which was brought to Crux as part of a deal with their former employer. Flows into the fund have increased by £330m since the move.

Pease says: “I wanted to be a long-term Henderson’s person and I needed a contract which allowed me to start the fund, which I could take with me and therefore indirectly that gave birth to Crux.”

Crux was registered in October 2014 but because of “a slightly prolonged extraction process” the fund managers weren’t able to leave and take the fund until June 2015.

“But here we are and to be fair it has been a fun journey,” says Pease, who is a big fan of the saying “smaller is beautiful”.

He says: “We are here now and actually, although we are a small set-up we have got all the things we need to run clients’ money. I’ve always had small teams. Some people feel the need to have big teams but I don’t feel like that. You are more versatile and quicker.”

Crux is owned by its 12 employees, and has “a pretty serious management side” with chief executive Alistair Reid, a veteran in the industry with stints at Morgan Grenfell and Thornhill.

Milne, who has worked with Pease for 10 years, says: “If you do fund management with a committee, then you are guaranteed to underperform because by the time you all agree on buying something it will have already gone.”

Pease says: “We are not hugely ambitious but we are ambitious in terms of returns for clients, but we don’t feel the need to have Hong Kong offices. So here we are back to basics.”

However, the firm recently acquired a new company, Oriel Asset Management, with its employees and three funds; a global, a European and a UK equity fund. The move will bring the total number of staff at the boutique manager to 17.

Crux’s total assets under management are at £1.4bn, but they will increase to almost £2bn with the addition of £94m in AUM from Oriel. Pease says: “We were particularly pleased with this arrangement with Oriel. Their team approached our chief executive in the second half of 2016 and came to a mutually agreeable deal for their staff and funds to come over to Crux. We are thrilled to have managers and funds of their quality wanting to join us.”

The duo also manages the FP Crux European fund, an equity fund launched in November 2015 which has gathered £26m so far.

Despite the small size of the fund and challenging times for European investors, it has outperformed the IA European (ex UK) sector, returning 26.1 per cent against the sector’s 25.4 per cent over one year.

To describe their management style, Pease and Milne say their approach is not dissimilar to what private equity does.

Pease explains: “We have a fairly eclectic portfolio with companies that share the same characteristics. The key is to find businesses which are essentially capital light so they can grow without risking a large amount of their capital. We also like certainty and the world is uncertain now. What makes it more certain is current revenue stream so you have predictability.”

The fund, which is concentrated with 58 holdings, focuses on businesses with a “large service element”, says Pease. This focus hasn’t changed through the years when the managers were at Henderson.

Pease says: “One of the questions we always like to ask to management is how they behaved in 2009. In 2008 we saw a complete meltdown financially but in 2009 we saw pretty much the same for industrials and you can tell an awful lot by how business models handled 2009 and a lot of our businesses handled it very well and for some of them you hardly even noticed 2009, which is
extraordinary.”

When researching stocks, Milne, who had stints at KPMG and is a qualified chartered accountant, likes to meet the companies.

He says: “There are always banks that produce research but with us it is always more important meeting the managers. Even yesterday, 45 minutes with the new CFO of Handelsbank, was more useful than reading a 1,000-page report so you can ask all the possible boring but practical questions.

“Also, for the way my brain works, I like to look at annual reports for the last 15 years because it is the only way to see what happens to the cash and all these banks, they always aggregate numbers or do funny things with accounts.”

The largest holding in the fund is German firm Aurelius, which makes up 4 per cent of the fund. The firm enjoyed a “good” income stream over the last three years the managers have held it, Pease says.

“They are effectively a private equity business and don’t charge performance fees,” he says. “The reason they are not charging performance fees is because the CEO still has 24 per cent of the business and he pays half the super profits of transaction back in the dividend.”

They also hold Coor, a Swedish facility management company as well as ISS, a catering company. Pease says: “Coor, like most of our businesses comes from outsourcing. This business is all about concentration. When they started in Finland at first their margin wasn’t even 1 per cent. In Sweden they’re gathering margins of over 9 per cent.”

The duo also holds Scandinavian banks, such as Nordea Bank which makes up 2.8 per cent of the portfolio.

Pease argues the capital buffer for Northern European banks is “very high” and since they remain domestic with no global ambition, the managers find it easier to control.

Meanwhile, Pease says he has “the majority” of his money in the fund as well as Milne who is “very much invested in it”.

He says: “I find it extraordinary when fund managers don’t do it, they are trying to sell you something they haven’t bought.”

Looking at markets, Pease admits headlines have been “ugly” in 2016 and says
“when economics get ugly, politics aren’t far behind”.

“Central banks and governments found it very difficult to re-kick the economy into growth,” he says.

“If you want comfort from ugly headlines look at how these companies have handled the last five to 10 years, look at how they’ve shown good global growth in their niche and how much cash they’ve generated and dividends they’ve paid out.

“You can’t as an investor sit on cash, you’ll become poor slowly and that is a promise.”

The Crux European Special Situation has returned 24.7 per cent over a year period versus the 20.5 per cent of the IA Europe ex UK sector, according to FE.

CV

1989

Pease joins Jupiter Asset Management as fund manager
2009-15

Pease is director of European equities at Henderson Global Investors
2009

Pease and Milne launch the European Special Situations fund at Henderson

2014

Pease founds Crux Asset Management

Numbers

£1.2bn

Assets in FP CRUX European Special Situations fund

0.86%

Ongoing charge figure of the European Special Situations fund

7

Years Pease and Milne have run the fund together

 17

Total Crux employees following Oriel AM acquisition