Mundy (pictured) is one of the few equity managers with a high cash weighting at the moment, and says the positive sentiment surrounding markets has pushed them to unsustainable levels. His contrarian style means he has a bias to undervalued stocks, and given current valuations, he says there simply aren’t enough opportunities to be fully invested.
A turbulent start to the year, driven by plummeting emerging market currencies and profit taking, has led some managers to talk up a buying opportunity in equities, but Mundy remains unmoved.
“I still need to see cheaper valuations,” he said. “I spoke to you about needing cheaper valuations last year, and even though we’ve had a fall, markets are higher now than they were back then.”
Performance of indices over 1yr
Source: FE Analytics
“One of the problems with information being so visible these days is that everyone gets excited even if there is a little fall in markets.”
“Yes there’s been a decent correction in emerging markets, but if you look at developed markets, the falls have been pretty small – particularly when you consider how strongly particular markets and stocks have performed recently.”
The MSCI World, S&P 500 and FTSE All Share have returned between 7.23 and 15.03 per cent over one year, between 18.82 and 38.06 per cent over five years and between 82.27 and 103.01 per cent over five years. In all three cases, the US market is up the most, followed by the UK index and the global index.
Performance of indices over 5yrs
Source: FE Analytics
As Mundy points out, the impact of the turbulence over the last month or so has barely made a dent on returns since February 2009.
Mundy’s reaction is a far cry from the industry professionals who believe the recent falls have presented investors with a buying opportunity.
He thinks the positivity surrounding equities at the moment is misplaced, and doesn’t reflect absolute valuations.
“Sentiment is very strong at the moment,” he said. “Because investors don’t like bonds, they’re bullish on equities instead. Investors have to be bullish about something, but just because something is cheap on a relative basis, it doesn’t mean it’s cheap.”
Mundy, who also runs the £2.8bn Investec Cautious Managed and £1.1bn Investec UK Special Situations funds, is unwilling to pinpoint an exact FTSE 100 level that would make him bullish, but says that individual stocks would have to fall some way from here.
“It’s strange, because the market could actually go up from here but certain stocks might have profit warnings that see their value go down,” Mundy explained.
“I’m not really sitting here with my fingers crossed thinking ‘I hope the market falls’. It’s all about individual stocks, and at the moment there aren’t enough of them.”
Temple Bar IT currently has 11 per cent in cash, while Investec UK Special Sits has closer to 8 per cent. Mundy can be most aggressive with his cash weighting in the Cautious Managed portfolio, which currently has 21.8 per cent in money markets.
The manager has put some cash to work in a small number of stocks in the last six months or so, but says that in general he has been sitting on his hands playing the waiting game.
“I’ve been chipping away at BP and Shell,” he said. “They’ve got new chief executives that have shaken things up a bit, and they’re doing what shareholders want them to do – bring down expenditure and improve cash-flow.”
“I’ve been buying these and as I wait [for the share prices to recover], it’s comforting to have a good yield from both of them.”
Shell and BP are currently yielding around 5.5 per cent apiece. Shell has struggled versus the wider FTSE 100 index over the past 12 months, though BP is slightly ahead. Still, it has not yet come close to recovering the losses it sustained in 2010 during the Gulf of Mexico oil spill.
Performance of stocks and index over 4yrs
Source: FE Analytics
FE Trustnet looked at the pros and cons of investing in the two companies in an article late last year.
Mundy says he has been adding to his position in government services company Serco, which is now a top-20 holding. FE Alpha Manager Neil Woodford is another who remains confident about the sector.
“It’s seen a significant sell-off and fallen on torrid times of late, but I continue to think there are growth opportunities for them,” he added.
The only other asset the manager has been buying up recently is gold for his Cautious Managed portfolio, following the poor performance of the precious metal in late 2013.
This has worked out well for the fund, with gold up around 5.73 per cent so far this year. This compares with a loss for most equity indices.
Performance of indices in 2014
Source: FE Analytics
Mundy’s Temple Bar IT is among the most consistent funds in the IT UK Growth & Income sector, and has outperformed its peers and benchmark over cumulative three-, five- and 10-year periods as well.
Its hefty cash weighting didn’t stop him from outperforming last year, however, which he says was down to good stock selection.
“You don’t need to be fully invested to outperform,” he said.
Mundy’s greater willingness to hold cash has seen his funds underperform in steep market rallies – particularly towards the end of the cycle – but his strong record in falling markets has more than made up for that.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
Investec UK Special Sits and Investec Cautious Managed have also outperformed versus their sector and benchmark over three, five and 10 years.
The only blemish on Mundy’s record is the Investec Global Special Sits fund, which has failed to perform as well as his higher profile portfolios since its launch in December 2007.
Temple Bar IT, which is yielding just over 3 per cent, has ongoing charges of 0.51 per cent, making it one of the cheapest trusts on the market. His three open-ended funds charge around 1.6 per cent apiece.
