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Investec’s Mundy looks to profit from investors’ ‘capitulation’

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Investec’s Mundy looks to profit from investors’ ‘capitulation’

Value-focused UK fund manager Alastair Mundy is eyeing opportunities in the increasingly sharp share price falls for stocks reporting disappointing news, as investor bearishness leads to ‘capitulation’. 

‘We like when there’s blood on the streets, that’s when it gets most exciting in life, when investors lose confidence in what they bought in easier times and start worrying rather than look at all the positives,’ said Mundy.  

As manager of Investec’s UK Special Situations and Cautious Managed funds, as well as the Temple Bar (TMPL) investment trust, Mundy is known for his contrarian style.

He looks for stocks that have fallen by at least 50% in value relative to the market and following the heavy stock market falls in the last three months of last year, is seeing more opportunities.

Volatile US politics, debt in China, the reversal of quantitative easing, Brexit and eurozone concerns had all played a part in investors’ recent loss of confidence, he said.

‘There’s an extraordinary number of question marks out there and it’s lead to a great deal of investor paralysis but actually I think it's worse than that, it's leading to investor capitulation,’ said Mundy. ‘You can see it almost day-by-day when a company comes out with bad results.’

That was creating opportunities for those investors willing to bet against the crowd, he said.

‘All we do is look in other people’s dustbins for our ideas and what you find is, no surprise, people throw a lot of rubbish.

‘But now and then they throw away something they’re embarrassed to own or didn't want to own anymore, they throw away stuff by mistake, stuff they that if they’d just looked after it a bit more carefully it shouldn’t have been thrown away.’

Mundy (pictured) used the examples of high street stalwart Marks and Spencer (MKS), roofing supplier SIG (SHI) and builders’ merchants Travis Perkins (TPK) – all holdings in his funds and trust.

While these companies suffered from low profitability, Mundy said they had strong balance sheets, unlike companies in the same position prior to the financial crisis, for instance.

Travis Perkins, a 5.3% holding in the UK Special Situations fund and a 5.1% position in Temple Bar, last month announced plans to sell its plumbing and heating division. It intends to focus on professional builders and will hold onto DIY chain Wickes.

The builders’ merchants had recently held a strategic review into its business, a move that has won the backing of Investec’s value team, headed up by Mundy.

‘The group looks set to shrink back to its original core business of serving trade customers, with this meaning that much of the corporate activity of the last 15 years or so will be reversed,’ the team said.

‘The merits of the new strategy will be partly contingent upon the prices obtained on disposal, but at anything other than total fire sale valuations for the unwanted bits, the high quality "core" will be revealed as trading at a derisory multiple.

‘As such we believe that at current levels the shares offer a compelling investment opportunity.’

Mundy was also positive about the turnaround potential for Marks and Spencer, a 3.4% holding in UK Special Situations, backing chairman Archie Norman's no-nonsense style. 

‘It’s like he’s gone straight to the end of the five stages of grief and gone to anger,’ said Mundy.

SIG, meanwhile – a 3.5% position in the fund – had been able to lower its cost margins and Mundy was positive about the change in leadership.

Last year, it emerged the company had overstated profits in 2016 by up to £3.7 million, according to reports. Meine Oldersma took over as chief executive in April 2017 from Stuart Mitchell, who stepped down after a profit warning. The shares fell 38% last year, with its  turnaround progress offset by difficult markets.

Mundy's value style has remained out of favour in recent years and his  UK Special Situations fund has delivered a mid-ranking performance over the last three years, up 22%, while his more conservative Cautious Managed fund, which also invests in bonds, is up 17%.

Shares in his Temple Bar investment trust have performed better over the same period, rallying 35%, a return beaten only by Finsbury Growth & Income (FGT) among UK equity income trusts.

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