Mundy has headed up the £1.4bn fund since 2002 and built up a reputation for his anti –consensus or ‘contrarian’ style of equity investing.
Over the longer term this strategy has paid-off with the fund returning 239.6 per cent since 2002 while average IA UK All Companies fund has returned 196.63 per cent and the FTSE All Share has gained 182.96 per cent.
Performance of fund, sector and index since 2002
Source: FE Analytics
However, over the shorter term the fund – while in positive territory over both one and three years – has underperformed thanks to some stock specific reasons, his large cash weighting and a short position on the S&P 500.
In 2014 the four-crown rated fund fell to bottom quartile and was down against the FTSE All Share index, which gained 1.18 per cent over the course of the year – albeit in a turbulent fashion.
Performance of fund versus sector and index in 2014
Source: FE Analytics
Investec UK Special Situations lost 1.23 per cent over the course of last year, struggling to find any ground against the index over most of the 12-month period.
The manager (pictured), who looks to scoop up stocks that have underperformed by at least 50 per cent relative to the market from the shares' price peak over the previous seven years, has not altered his bearish view that led to his losses last year.
In fact he has been selling down his best performers, as well as his broad mid cap exposure, and been topping up his positions in UK banks, oil majors as well as utility giant Centrica.
“As the market has gone up things have got very expensive and I see no justification for it. US equities are obscenely over-valued - that is sticking out like a sore thumb. When you look around in the mid-cap space in the UK there are lots of stocks that have had good runs for 15 years or so but they are at really extreme levels,” he said.
Mid-caps have rallied over the past few years despite having fallen hard last March, compared to large caps as shown in the graph below.
Performance of indices over 2yrs
Source: FE Analytics
While the FTSE 100 has also been grinding higher, setting several new highs in the past few weeks, Mundy is feeling more happy in some of its longer term battered sectors as well as those most suffering from the oil price slide last year.
However, the manager is firmly believes the overall market is lacking value.
“In general we have been looking to sell rather than looking to buy. The market has been going up and it is not supported by fundamentals which makes the market more fragile and therefore companies are vulnerable to profit warnings.”
His cash weighting remains unchanged at around 11-12 per cent of the portfolio’s total assets despite Mundy seeing a dearth of value and having sold down or completely out of some of his best performers of the past few years.
“Every time we sell something we have to buy something and in general we have been selling our winners, things like BT and Vodafone and switching into banks, oil majors - Shell & BP - and Centrica.”
Financials have crept up from 10 per cent of Investec UK Special Sits’ total exposure three years ago to around 25 per cent today.
He owns HSBC - Lloyds, Royal Bank of Scotland and Citigroup with the former the fund’s largest holding at 8 per cent of AUM.
HSBC, Lloyds and Royal Bank of Scotland have all had a tough time since the financial crisis having lost most of their value but their share prices have started to climb back up, suggesting more investors are backing their recovery story.
Mundy believes that improving fortunes and less regulatory punishment will open up banks to income investors as they start to pay more regular and increasing dividends back to shareholders.
“The next step for these banks is to start paying dividends. The regulators have had their pound of flesh and more, they have paid a lot of fines and there has been an increase in the bank levy.”
“Underneath that, there is some very nice and profitable businesses in the UK and if they can grow their books slowly they can generate dividends and thereby appeal to a whole new load of investors.”
Investec UK Special Situations has ongoing charges figure of 0.84 per cent and has a yield of 2.81 per cent.