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Top Europe fund sticks with Google after record fine

Star fund manager Richard Pease keeps Crux European Special Situations fund in Google and Aurelius, a German turnaround specialist under attack from short sellers.

Top Europe fund sticks with Google after record fine
Google’s record €2.4 billion fine by the European Union for anti-competitive practices regarding its shopping service has done little to shake Crux Asset Management analyst Roland Grender’s faith in the business.
Although the fine is disappointing, Grender said it does not fundamentally damage his outlook for the tech giant, a staple of many US, global and technology funds. He works on the investment team for the Crux European Special Situations and Crux European funds, working alongside star manager Richard Pease and James Milne. Nasdaq-listed Alphabet (GOOGL.O), the parent company of Google, is held in the overseas allocation of both funds.
‘It has 35% margins and an unassailable competitive position – unless the regulators get involved. It is pretty cash-generative and everyone we speak to about where their advertising dollars are going say more and more are going to Google and Facebook,’ he said.
Alongside its huge core search business, Grender notes that investors gain access to its Android, YouTube and cloud businesses – and the growth potential of these divisions has not necessarily been priced in.
‘We still see significant upside there. What could fundamentally derail the business is regulation and we will keep a close eye on it,’ he added.
His comments chime with Scottish Mortgage Trust (SMT ), the FTSE 100-listed global investment trust, whose managers expressed concern before the company was fined of the risk of a regulatory and political backlash against the dominance of technology networks like Google. 
Grender hopes Google will be able to stay on the right side of the regulator but said further fines could not be ruled out.
‘That is the risk we are taking, but having said that this is a mega-cap stock that offers 40% upside if it does not pay out - so I think I am prepared to take a little bit of risk on that front,’ Grender added.

Defending Aurelius

Back in March, German-listed Aurelius Equity Opportunities – the £1.7 billion Special Situations fund’s largest position – saw its share price come under pressure after hedge fund Gotham City launched an attack.

Gotham City is well known for publishing negative reports that are followed by short-selling, reflecting their expectation that the share price will fall. Previous targets of the  New York-based fund have included insurance claims processor Quindell, which lost £1 billion of its market value after Gotham City published a scathing report in April 2014. This ultimately sparked Financial Conduct Authority and Serious Fraud Office investigations.

Led by Dr Dirk Markus, Aurelius buys non-performing divisions from larger companies. It then turns them around, and sells them on at a higher price later down the line. Gotham City’s list of allegations included a claim that it is unable to reconcile where 43% to 100% of the company’s earnings come from. Aurelius has issued numerous rebuttals and is considering taking legal action.

In Pease’s opinion, Gotham City’s allegations towards Aurelius are overstated.

‘They got the timing of their attack perfect, as Aurelius was in a close period and could not respond immediately,’ the Citywire A-rated manager added.

Pease points to Aurelius’s excellent track record of turning around companies and believes they are well positioned for future success.

Straight after the note was published Aurelius’s share price fell from €66 to €35, which presented him with an opportunity to add to the fund's position. The shares have since rebounded to €46. Having originally bought in at €18 per share four to five years ago, Pease has made significant gains on the investment - even at today's lower share price.

A number of the points raised in the Gotham City note could be attributed to mistranslations, Pease added.

For example, the hedge fund alleged that Dirk Markus falsely claimed to have a PhD from Harvard, which Pease says is down to a mistranslation.

‘If you read the German bit of his website, it is very clear that he did a term at Harvard of his PhD. He makes no reference to having a PhD from Harvard. He got his PhD from Copenhagen,’ Pease added.

The fund manager points to Aurelius’s strong cash position, healthy dividends and share buyback programme. He estimates that the net asset value of the company is currently €52 per share plus. If you factor in the potential for future success in turning around other businesses in its portfolio – including the European division of Office Depot – he suggests the NAV per share could easily go to €70 upwards.

‘It is an example of a company where you have to hang on, let the adverse press pass and look at the numbers. It is on a big discount and has a big dividend yield,’ he added.

Over the five years to the end of May, Pease has returned an impressive 177.1% versus 101.2% by the average fund in the Investment Association’s Europe excluding UK sector. Over the two years to the end of June, the fund is up 44.6% versus 35.5% by the sector average.

Pease left Henderson Global Investors to set up Crux Asset Management in 2015. He was joined by Milne and the pair were able to bring the Special Situations fund over with them, which was £1.2 billion at the time.

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