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Contrary nature


Investec’s Alastair Mundy is a genuinely contrarian manager simply looking to buy stocks when they are out of fashion and therefore cheap.
This basic approach has paid of in performance terms, with both his UK special situations and cautious managed funds top decile in their sectors over three and five years to May 13.

In the short term, however, the special situations fund in particular has dropped down the rankings, with Mundy holding nothing in the market-leading mining sector.

He has avoided this area as the team find it difficult to value the stocks and is also no fan of the emerging market exposure theme currently so prevalent among UK equity managers.

Mundy says: “Two years into a bull market, many of the same momentum stocks are still leading performance, which will returns hit performance of contrarian mandates.”

Overall, his franchise is in large and mid-cap out-of-favour companies although Mundy admits to being somewhat more risk-averse and benchmark aware than many contrarian peers.

He says: “We buy unpopular stocks where there is a good chance of recovery but less risk of losing too much money if this fails to come through.”

Mundy says successful contrarian fund management is effectively about taking on irrational investors and his stock universe is companies where the share price has fallen by at least 50 per cent.

“This kind of investing means picking the right fights against consensus, which we can only do via in-depth due diligence on stocks.

“Overall, our portfolios aim to provide a group of holdings where we are being adequately compensated for opposing conventional wisdom.”

Mundy avoids any kind of macro or thematic bets on the funds although buying out-of-favour stocks already has a certain amount of econ-omic and market views embedded in the cheap valuation.

His portfolios have displayed several anti-themes over the years, avoiding technology in the late 1990s, for example, and miners now, but he says this is purely down to stock-specific calls.

“At present, we have defensive stocks such as Glaxo and cyclicals such as Signet Jewelers among the biggest holdings and look to blend the portfolios to avoid any kind of thematic skew.”

On the near-£2bn cautious managed fund, the aim is to provide long-term equity exposure while reducing volatility as far as possible, with Mundy focusing on his favoured out-of-favour stocks plus some bonds.

In recent months, he has reduced the equity position from 60 per cent to 50 per cent, largely selling out of various UK stocks as they reached fair value, exiting names including Drax, Invensys, Paddy Power, BP and Vodafone.

With the proceeds, Mundy has upped his Japan exposure slightly, largely buying exporters as recent yen strength has dented their popularity.
Elsewhere, he has an all-time high cash position of 15 per cent, not indicating bearish-ness on equities but rather a lack of attractive oppor-tunities in the market.

Mundy also holds long-standing positions in gold and Norwegian government debt, seeing the latter as a fairly uncorrelated play as the country’s economy and currency are strong compared with global peers.

He has largely avoided corporate bonds, claiming managers must find better uncorrelated assets after credit let investors down as a volatility dampener during 2008 and 2009.

Looking at stocks, Mundy has remained positive on large blue-chips in areas such as pharmaceuticals, citing selling by life funds as a key factor.

He says: “Active managers are often reluctant to hold these companies as they want to discover the next mid or small-cap gem but we have found good value in the market’s biggest stocks.”

On the banks, Mundy holds HSBC but is still reluctant to own names such as Lloyds, RBS and Barclays despite improvements in balance sheets and valuations.

“Many banks are moving back towards basic deposit and lending businesses again but there are other issues on the horizon to make us cautious, not least increased regulation,” he says.

Showing his contrarian nature once again, Mundy is not banging the M&A drum as a reason for stock purchases in current markets, saying that his funds have never particularly benefitted from this theme.

He says: “This shows that companies rarely buy each other purely for valuation reasons and we see M&A as a fairly random trend so will never buy stocks with that in mind.”


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