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.”
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.
“This determines that we will typically have a mix of defensive holdings and more cyclical companies. During the last half of last year, we have been reducing our holding in Games Workshop and also in UK Commercial Property Trust as the share price currently stands at a good premium to the net asset value. We are still comfortable with the UK shares we hold. In many cases, we have held them for several years and believe that a number of them still trade at significant discounts to their intrinsic value.” Therefore the portfolio is very defensively positioned on concerns asset classes will be highly correlated in a future market sell-off.
He adds: “I think the biggest theme is the lack of value in value. As the bull market matures, investors have been scrambling around to find ‘cheap’ stocks with high yields and these have been pushed up to historically high absolute and relative levels of valuation. When valuations are stretched, macroeconomic concerns become harder to ignore. It is a bit of a ‘least ugly competition’ currently with investors reluctant to switch to cash. We believe this encourages the push to unsustainable levels and believe there will be long-term benefits for current inactivity. Patience will ultimately be rewarded.”
EXPERT VIEW
Martin Bamford, managing director and chartered financial planner, Informed Choice
VERDICT
“Perhaps better known for the equally good Investec Cautious Managed fund, Mr Mundy and his contrarian style tend to deliver results over the longer term. With more than 11 years managing the fund and more than £1bn of investor cash under management, this fund is the smart choice for investors who want to add value to their domestic equity portfolio without taking unduly high levels of risk.”
