According to FE Analytics, Mundy’s £1.4bn Investec UK Special Situations fund has returned 225.92 per cent since he took charge in August 2002, meaning it has comfortably beaten the IA UK All Companies sector and its FTSE All Share benchmark, which are up 163.78 per cent and 177.28 per cent respectively over that time.
Performance of fund versus sector and index since Aug 2002
Source: FE Analytics
Mundy (pictured) became a firm favourite with investors due to his strict contrarian style, which according to the Square Mile research team – who have awarded the fund an ‘AA’ rating – involves investing in “companies whose shares have underperformed by at least 50 per cent relative to the market from the shares' price peak over the previous seven years, where sentiment is poor and where they perceive there to be significant value”.
As a result of that approach, Investec UK Special Situations has tended to underperform in strongly rising when all investors are seemingly bullish and chasing the same stocks– such as in 2013 – but has come into its own when sentiment is weak.
Our data shows, for example, it was top quartile in 2011 when the European sovereign debt crisis intensified and top quartile in 2008 when the Lehman Brothers declared bankruptcy, throwing global financial markets into turmoil, as a result of not holding any banks.
Given that past return profile, it does comes as a surprise that the four-crown rated fund was bottom quartile and down against the index in 2014, which turned about to be a quite turbulent year for markets.
Investec UK Special Situations lost 1.23 per cent last year and was never really up against the index over that 12-month period.
Performance of fund versus sector and index in 2014
Source: FE Analytics
It is normally viewed as a buying opportunity when a highly-rated and successful manager goes through a period of underperformance because it means their style has been out of favour, but then at the same time investors are often told that they should sell when a fund starts acting in a way that isn’t expected of it.
So, should investors now be looking to buy on the dip or should they sell Mundy’s fund and look for other vehicles which can play a similar role in their portfolios?
Ben Williams, investment manager at Saunderson House, has been a long-time backer of the fund and says he sees no reason to sell Investec UK Special Situations and is even looking to add more exposure to the portfolio.
He says there are number of obvious reasons why Mundy’s fund struggled last year, but none of them should cause investors to overreact. One of which is the manager’s high weighting to BP and Royal Dutch Shell, which combined account for 14 per cent of his assets.
Both were hit hard last year as a result of the plunge in the oil price.
“No-one was forecasting such a sharp fall in the oil price but Mundy retains his overweight positions and Mundy points to growing investor pressure on large oil companies to generate higher free cash flow,” Williams said.
“While waiting for them to achieve this goal, which is likely to be through reduced capital expenditure and/or the disposal of non-core assets, investors are being paid over a 5 per cent dividend yield.”
Williams says another of Mundy’s mistakes was buying food retailers – such as Tesco and Morrisons – too early.
Mundy told FE Trustnet in April 2014 that he had bought into the bombed-out supermarkets, which had been rocked by increased competition from discounting rivals and issues about over capacity, on the back of share price weakness.
However, our data shows since the article was published, his holding in Morrisons has only just broken even, while Tesco is still down more than 20 per cent.
Performance of stocks versus index since April 2014
Source: FE Analytics
Again, Williams says this isn’t a massive concern as nobody is ever likely to time the market correctly and he likes the fact that the manager is sticking to his process and fishing in areas of the market which are massively out of favour.
Mundy’s decision to short the S&P 500 last year – which ended 2014 with a 20 per cent return in sterling terms – was again a contributing factor to those lacklustre returns, according to Williams, though the manager believes that given that the index trades at a very rich multiple, it is only a matter of time until the position starts to generate returns.
Given his views, Williams thinks now is a good time to buy into Investec UK Special Situations.
“While Mundy is struggling to find many attractively valued companies that fit his strict investment criteria and he is concerned about the overall level of debt in the economy, the portfolio is certainly not one stuffed with ‘safe defensives’ with no hiding positions in Vodafone, AstraZeneca, Diageo, Reckitt Benckiser and SAB Miller,” he said.
“He holds a number of interesting turnaround/recovery stories, such as Travis Perkins, Kingspan, RBS, Citigroup and M&S.”
Williams added: “His focus on valuation anomalies and exposure to companies at varying ‘vintages’ of recovery is likely to, we believe, result in strong returns for investors over a full market cycle and perform particularly well during falling markets.”
That’s not to say everyone has stuck with Mundy through this tough patch.
One of FE Trustnet’s contacts, who wished to remain anonymous due to compliance issues, told us that they were in the process of selling the fund as they felt Mundy had been too dogmatic in his bearishness, criticising him for not putting his sizeable cash weighting to work during periods of volatility.
Indeed, cash still makes up 11.6 per cent of his fund even after the recent market falls.
Ben Willis (pictured), head of research at Whitechurch, says he can certainly understand why investors may be concerned with Mundy’s recent underperformance, but he too thinks now is a good time to consider it.
“His style didn’t help him last year, but it was stock specific problems which really backed fired on him and made sure that 2014 was anything but a stellar year for Mundy,” Willis said.
“However, we do like him. Managers are not infallible and they will come unstuck at times, but it is how they bounce back after a period of poor performance. We wouldn’t put it in the fold category, if anything, it would be a buy.”
Investec UK Special Situations has ongoing charges figure of 0.84 per cent and has a yield of 2.81 per cent.