Mundy ignores performance drag and keeps hedges

Contrarian investor Alastair Mundy has pledged to retain his inflation-hedging positions in spite of them proving a significant drag on performance.

Mr Mundy’s flagship £2.5bn Investec Cautious Managed fund is currently the worst performing fund in the IMA Mixed Investment 20-60% Shares sector in the past year, according to data from FE Analytics.

The negative performance has also started to drag on the fund’s long-term numbers and the fund has slipped into the bottom quartile for three and five years – though it has beaten its peer group in the past 10 years, the data provider said.

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Long-serving fund manager Mr Mundy said the fund had underperformed due to four “problem children” trades, of which three are hedges against inflation rising.

The fund currently has 6.9 per cent of its assets invested in gold, 2.8 per cent in gold mining shares and 7.9 per cent in Norwegian government bonds. Both gold and the Norwegian currency, the krone, are seen as safe havens in the event of inflation.

Mr Mundy said he had “no idea” when, or from where, an inflation shock would come but said it was prudent to be cautious given the suddenness and unpredictability of past shocks.

He suggested a rise in interest rates in the UK could have a big impact on mortgages because “8 per cent of people in the UK cannot pay their mortgage” even at current levels”.

The consensus from economists is that deflation is far more of a threat than inflation in the near future, and the rate of inflation has been declining in the US, UK and Europe in recent months.

Falling inflation expectations are likely to have been one of the contributing factors behind the precipitous fall in the price of gold in recent years, and a drop in the price of oil has hurt the krone recently.

The price of gold has fallen by 37 per cent since its peak in September 2011, while gold mining stocks have had a disastrous time in the same period, with the FTSE Gold Mines index falling by 72.8 per cent.

Both the gold price and gold miners rebounded this year, but a reversal of fortunes has seen the FTSE Gold Mines index fall by more than 30 per cent in the past two months.

Mr Mundy said that, apart from banking stocks during the financial crisis, he did not think he had “seen anything as out of favour as gold mining shares”.

The manager admitted he had “lost a significant amount of money in gold mining shares” but that he was holding the position in case of inflation.

As well as the gold and krone positions, the Investec Cautious Managed fund has 18.6 per cent in US and UK index-linked government bonds, another inflation hedge.