Alastair Mundy, who runs the £1bn Temple Bar Investment trust, is persevering with his investment in troubled FTSE 100 stock Capita, despite the shares almost halving in a single day.
The price of outsourcing and professional services company Capita shares dropped from £3.59 on 29 January to £1.58 on 1 February after a profit warning, and prior to that had fallen by 75 per cent in three years.
Mr Mundy said the share price drop at the end of January was acutely painful for him as he began buying the shares at that time.
The fund manager said: "We have suffered nothing comparable in terms of size and abruptness of fall after buying a stock in nearly two decades and it would be easy to conclude that a big mistake must have big lessons."
But he added: "Our investment process is based on the observation that investors recurrently, indeed habitually, overreact to bad news, with this overreaction often providing us with buying opportunities.
"What has just happened with Capita is, we believe, an exceptionally large overreaction, with the reasons for this readily apprehended.
"The market rarely responds well to the surprise scrapping of a dividend or an emergency capital raise, while the very recent collapse of (the superficially similar) Carillion has greatly heightened investors' fear and loathing of Capita.
"The magnitude of the overreaction can therefore be understood, but the fact of it still surprises."
Mr Mundy confirmed he has bought more shares since the share price plummeted "because it is the right thing to do for our investors."
Mr Mundy's fund has underperformed the AIC UK All Companies sector over the past one, three and five years.
He said this is because his investment style, value investing, has been deeply out of favour.
Francis Klonowski, who Klonowski and Co, an intermediary firm in Leeds, said Temple Bar is a trust "that naturally springs to mind" as being suitable for clients.
He described Mr Mundy's style as being akin to "rooting around in other people's dustbins" looking for the stocks that have been disregarded by the wider market.
The trust has returned 162 per cent over the past decade, compared with 90 per cent for the average investment vehicle in the sector.
Dale Robertson, who is about to launch the Chelverton European Select fund, which has a value approach to investing, said the traditional approach to that investment style, which relies on investing in the companies that have fallen farthest, may be less reliable in future as technological change means many such companies won't recover.
Stephen Yiu, who runs the Blue Whale Growth fund, said value investing as a style tends to do better when global economic growth is picking up, as it is now, because investors tend to focus more on valuation.
He said when growth is slow, few companies are growing, so investors stick with low growth defensive shares of the sort that value investors don't like.
Another investor with a significant holding in Capita is Neil Woodford, who has also vowed to stick with the shares.
david.thorpe@ft.com
