According to the manager of the Crux European Special Situations Fund, the decision was taken because 30% of the firm’s profits are exposed to China, where he said capacity for lift production is close to double the likely demand, all of which leaves Kone open to pricing pressure.
“As Kone was trading on 23 times earnings, I felt this could present a dangerous situation. It is still a great business, but you have to consider the structural headwinds,” Pease said.
But, it is also important to place the decision within his still gloomy view of the general economic backdrop, one characterized by generally ugly politics, low economic growth and lots of macro-economic concerns he said.
“I have learnt to stick to my guns, not get seduced by adventures, or to go bottom-fishing when this equates to buying junk.”
Looking instead for predictable earnings, Pease said he continues to like outsourcing companies, to which he attributes much of the outperformance of the fund during a choppy start to 2016.
Examples are service management firms ISS and Coor, and contract caterer, Elior.
“I expect these companies will experience healthy organic growth over the year ahead, even if markets are tough,” Pease said, “because all three offer businesses the opportunity to make cost-savings and to become more efficient by outsourcing certain functions, making them net beneficiaries when corporates come under pressure.”
Another firm Pease recently bought into was French electrical and mechanical maintenance company, Spie, to which he was attracted by its negative working capital position.
All four companies have also been through private equity ownership, a characteristic, Pease likes.
According to Pease around 20-25% of his portfolio has been through private equity hands at some stage, a sign that Crux clearly looks for similar things to private equity firms.
“I like companies that are capital light, cash generative with recurring revenue, I get excited when a company does not need my money,” he said.
