This year’s spike in volatility has led to an embarrassment of riches among the stocks being discarded by growth managers, according to Alastair Mundy (pictured) of the Temple Bar investment trust
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As a value manager, Mundy likes it when there is “blood on the streets”, with investors losing confidence in what they bought in easier times and worrying about the negatives.
He said you don’t need to look too hard to find the negatives at the moment, whether it is Chinese debt, trade wars, Brexit or the end of the economic cycle in the US, with this combination of factors causing a state of “investor paralysis”.
“Actually, I think it is worse than that,” he corrected himself, “it’s leading to investor capitulation.
“You can see it almost day-by-day when a company comes out with bad results: the share price falls to such an extent that you wouldn’t even touch it with your mate’s barge pole, never mind your own.”
Mundy described his process by saying “all we do is look in other people’s dustbins for ideas”. He added that while it is not surprising to see that a lot of the stuff other fund managers are discarding is “complete rubbish”, every now and again they allow emotion to cloud their decisions, for example by throwing away something they are perhaps too embarrassed to hold.
“They throw away stuff by mistake: stuff we feel that if they looked after it a little bit more carefully, it shouldn’t have been thrown away,” he continued. “And the dustbin seems to be getting bigger by the day. So as value investors, things are definitely getting more interesting.”
Mundy said the panic caused by this year’s increase in volatility has led to investors indiscriminately selling out of entire sectors and regions, a trend exacerbated by the growing use of passives to gain exposure to certain markets.
For example, once the macro prospects for Turkey began to deteriorate, many investors just sold their entire Turkish exposure – regardless of whether the stocks they held derived their earnings from hard currencies, for example.
Mundy said a similar thing is happening at home, with the uncertainty surrounding Brexit so hard to call that both domestic and international investors are steering clear of the region entirely.
This is the perfect hunting ground, the manager said.
“I always say we don’t go looking for trouble, trouble comes and finds us,” he continued.
“I remember watching one Clint Eastwood film years and years ago where he is sitting at the bar, minding his own business, when it all kicks off. He doesn’t move, he’s got nothing to do with it, but all of a sudden someone bumps into him and knocks his beer over. And at that point, Clint goes crazy.
“We just don’t pay much attention to things until trouble comes and finds us. So everyone is getting so depressed about Brexit, but we then say, because of their activities, what do we get to look at?
“What has landed in our lap are stocks which have quite a negative outlook priced in.”
In a recent article, Janus Henderson’s Paul O’Connor said many UK large-cap stocks that derive the majority of profits from overseas have been unfairly tarnished by the Brexit brush and therefore look attractively valued.
However, Mundy is also happy to own domestically focused UK stocks, which now account for 60 per cent of his portfolio, saying the more painful it gets, the more domestic he will go.
“We have no insight as to the outcome of the Brexit negotiations, but typically when investor sentiment is this extreme, pricing anomalies occur,” he added.
The manager tries to look through short-term issues to see if there is a chance he can pay a low price for the profits a company can generate through the cycle. He tends to focus on stocks that have fallen by 50 per cent relative to the market, meaning these businesses typically have “issues”. However, he said that just because he is a value investor, this does not necessarily mean he is more likely to fall into value traps.
“I gave a presentation to a bunch of sixth formers earlier in the year and I just happened to mention ITV,” he continued, “and they looked at me as if I’d been in prison for 25 years. ‘What is this ITV of which he talks?’
“So yeah, I absolutely agree that we have to worry about structural decline, but it is not just my stocks, it is everyone’s stocks. It’s just as relative to quality as it is to value, but at least we have the advantage we are buying stocks cheaply.”
Data from FE Analytics shows Temple Bar Investment Trust has made 388.13 per cent since Mundy took charge at the start of October 2002, compared with 306.62 per cent from its average IT UK Equity Income peer and 271.94 per cent from its FTSE All Share benchmark.
Performance of trust vs sector and index over manager tenure
Source: FE Analytics
It has ongoing charges of 0.49 per cent and is currently on a discount of 6.56 per cent, compared with 5.83 and 5.97 per cent from its one- and three-year averages.