Mundy recently told FE Trustnet that he is bearish on the UK equity market in general, and that the time to buy was five years ago. However, he says that he has bought shares in Tesco and Morrisons shares in the past few weeks on the back of their share price weakness.
“Tesco and Morrisons have been badly affected by a rising market share from Aldi, Lidl, Waitrose as well as online retailing and convenience,” he said. “But, we think investors are too confident in asserting the current trends.”
“They [Tesco and Morrisons] have got all these things going on and in many ways it seems there is no way out for these companies.”
“I think that is a very simplistic way of looking at them. Food retailing just goes through cycles over many years.”
“Thirty five years ago I used to go shopping with my mum at Sainsbury's on the high street, that was convenience retailing and then became outdated and then it went out of town.”
“It’s very dangerous to extrapolate current fads and think they are long term trends. If you extrapolate Lidl and Aldi’s growth and take it in isolation you’d think it they would have 25-30 per cent of the market share soon but that seems reasonably unlikely because it’s not exactly a brilliant shopping experience.”
Both Tesco and Morrison’s share prices have tanked over the past year. Tesco has lost 22.64 per cent and Morrisons has lost 25.34 per cent, by comparison the FTSE All Share has risen 8.5 per cent.
Performance of stocks vs index over 1yr
Source: FE Analytics
The two supermarkets have seen their business suffer as the food retail market becomes increasingly polarised between the rise of the discounters likes of Lidl and Aldi who have been growing their business by double digits for several years as well as the increasing market share taken at the higher end of the market, mostly from Waitrose.
“They [the mainstream supermarkets] have had a bit of an oligopolistic approach to the business and didn't see the threat quickly enough and now have to catch up,” Mundy said.
Mundy has taken a larger position in Tesco over Morrison as he says the supermarket, as the market leader, has got an easier recovery story.
“However, they [Tesco] seem reluctant to face up to reality at the moment and be in a bit in denial,” he said.
Tesco announced today that annual profits were down 6 per cent, the third consecutive year that saw profits fall.
However, Mundy said this had not dispirited him and he saw any subsequent share price falls caused by the news to represent a further buying opportunity.
Supermarkets have been out of favour with fund managers in the past few years, although a few value managers have said they are looking for the right time to re-buy exposure.
Rathbone’s Julian Chillingworth and Miton’s George Godber both have recently told FE Trustnet they were eying positions in supermarkets as their next plays, but had not done so yet.
Only one fund in the IMA universe holds Tesco as a top ten holding; the £36.9m Thesis Overstone UCITS Equity Income has 5.6 per cent in the supermarket
Four funds hold Morrisons as a top ten holding; HSBC European Growth – 4 per cent, Schroder Recovery 3 per cent - and Thesis Cartesian UK Absolute Alpha which has 2.5 per cent.
Mundy manages five Investec funds with total assets under management of £4.2bn and the Temple Bar investment trust.
He has added positions to the two supermarkets to the Investec Special Situations and Investec Cautious Managed fund as well as the Temple Bar investment Trust.
Over five years Investec UK Special Situations has outperformed its IMA All Companies sector average returning 121.23 per cent compared 110.68 per cent, also beating its benchmark - the FTSE All Share – which rose 105.07 per cent.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
The Investec Cautious Managed fund has also outperformed its IMA Mixed Investment 20-60 per cent sector average over five years, returning 65.48 per cent compared 51.23 per cent, also beating its benchmark - the UK Consumer Price Index– which rose 15.99 per cent.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
Mundy is notoriously a bearish fund manager and known for a deep value and contrarian style.
“It’s quite nice buying something when everyone else is bearish about it,” he said.
He has held a high cash weighting - 10 per cent in the £1.8bn Investec Special Situations fund since June 2013 and over 20 per cent in the £2.8bn Investec Cautious Managed for more than a year.
He recently told FE Trustnet that bullish investors are living in the past and that the time to be optimistic on equities was five years ago.
The manager says rising markets have been caused by investors’ growing appetite for risk in an artificially low rate environment rather than any growth in underlying profitability.
