Fund Review: Investec UK Special Situations

Taking a contrarian approach in the £1.08bn Investec UK Special Situations fund has paid dividends for manager Alastair Mundy and his team, with the fund outperforming the FTSE All-Share in seven of the past 10 years.

Mr Mundy, who has managed the fund since 2002, says: “We remain, as always, focused on purchasing out-of-favour companies that are cheap on our assessment of their normalised level of profits and have sound balance sheets.”

The manager explains: “As contrarians, we are always busy searching for out-of-favour companies in which other investors have lost interest, given up on or just plain forgotten about. And then we try to work out which of these companies might have a good chance of bouncing back and being loved again. As always, our strategy remains bottom up, looking for out-of-favour, cheap stocks with balance sheets appropriate to their business models and have chosen to apply this strategy patiently.”

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Mr Mundy says there are four simple reasons why he continues with the contrarian approach, one of which is that it “remains a well-kept secret”. He adds: “There continue to be rewards for consistently investing in out-of-favour stocks. Second, it is scalable. By this we mean that we are able manage a lot of money without fear of detriment or dilution to the portfolio. This is because when we are buying a stock it is very out-of-favour and hence there’s a lot of stock available; when we are selling it there is great demand as it is back in favour.”

The manager also points out the strategy can be hard to replicate, noting that while the evidence shows it is good to buy low and sell high, people still prefer to buy high and then try to sell even higher. “The reason for this is that buying low is very uncomfortable. You feel very lonely. It’s a bit like eating a meal in a restaurant on your own. Finally, we are emotionally suited to it [contrarian investing]. It’s part of our DNA to be more interested in buying a share as it falls in price, even when things get a bit crazy at the bottom of the market.”

In the five years to January 8 2014, the fund returned 117.56 per cent, outperforming both the IMA UK All Companies average of 104.43 per cent and the FTSE All-Share index, according to FE Analytics. The one-year performance has been equally strong with a return of 25.77 per cent in 2013, compared with the FTSE All-Share figure of 20.81 per cent. The manager, however, notes that in the UK market “pickings have been slim over the past few years”.

He explains: “We have found that a number of companies entering our out-of-favour universe have either unsound business models, unattractive balance sheets or valuations that already discount a strong recovery in earnings. We strive to ensure we have exposure to a number of companies across a number of industries that have moved out of favour at different times for different reasons.