It will either take a swathe of profit warnings or a 30 per cent fall in UK equities before contrarian investor Alastair Mundy puts his high cash balance to work, who says he has never run a more concentrated portfolio on his Temple Bar Investment Trust due to the lack of the opportunities in the current market. 
There has been an increased sense of nervousness among investors of late, with most concerned about the Brexit-induced uncertainty within equity markets.
Indeed, with just five days to go until the EU referendum, many managers have seen it fit to keep high levels of cash within their portfolios to protect investors against the potential for ramped-up volatility if the leave vote comes out victorious.
Mundy is another who is keeping a high proportion of his assets parked on the side-lines – though he says it has little to do with either political or macroeconomic headwinds.
He is renowned for his highly contrarian approach to the market, only really buying stocks which have fallen some 50 per cent from their peak over the past seven years. Therefore, with the UK equity market having made 140 per cent since the global financial crisis despite slowing profit growth, he is holding 10.1 per cent of his closed-ended fund in cash.
Performance of index since the global financial crisis
Source: FE Analytics
He also adds that he isn’t the only manager to be struggling for investment ideas and therefore the whole market needs a major shake-up.
“I think if you took a poll of fund managers to gauge the boredom levels at the moment, I think the boredom-o-meter would be at its highest it’s ever been. I can’t just be me. I think everybody is struggling for ideas,” Mundy (pictured) said.
“We all have our comfort blankets which we revert to. For some it’s Unilever; me, I have strange comfort blanket in Royal Bank Scotland. What would change that? Well, we just need a lot of stocks to go down.”
“How do we get that? We need more profit warnings or the market as a whole will go down a lot. Frankly, I don’t really care. If I came in tomorrow and six stocks had issued profit warnings and were down 30 per cent and all look cheap, we’d put our cash to work, or we’d wait until the market falls 30 per cent.”
Mundy has held high levels of cash for a quite a long period of time now, though.
In his mirror open-ended fund (Investec UK Special Situations), for example, his average cash weighting has been 8.3 per cent over three years. It has reached highs of 13 per cent in July 2013 and has never dipped below 2 per cent.
Mundy’s cash weighting in Investec UK Special Situations over 3yrs
Source: FE Analytics
As the graph above shows, the only time he has really put his cash to work in a meaningful manner was during the late-summer of 2015 – a period which included the infamous ‘Black Monday’.
A number of managers have warned against holding high levels of cash at the moment, though. One of whom was FE Alpha Manager Alex Wright, who told FE Trustnet that keeping capital out of the market was a lose-lose situation at this point in time with the EU referendum on the immediate horizon.
“You need to untangle the difference between the UK economy and the UK market. While I think a leave vote will undeniably be bad for the economy, I don’t necessarily think it would be bad for the UK market over the short to medium term because of the 66 per cent of the market which is facing non-UK currencies,” Wright said.
“If we were to vote to leave, the most hit asset class will be pound sterling which could potentially devalue significantly but also, the third of the market in the UK that is facing pound-based earnings in the economy will be sold off.”
“But, I think that will be counteracted by the other two-thirds of the market doing much less badly and therefore actually, even on a vote to leave, you would see the market outperforming sterling cash.”
However, Mundy says he isn’t just holding cash for the sake of it.
“Our biggest 30 stocks are more than 80 per cent of the portfolio. That’s the most concentrated portfolio I’ve ever had in my fund management career. Not because I’ve become incredibly confident after all these years, it’s more of a reflection of the amount of opportunities we are finding,” Mundy said.
“We just think most stocks are either fair value, expensive or very expensive.”
Unfortunately for Mundy’s investors, his bearish positioning over recent years has hurt his relative performance.
This is largely due to the fact that value investing, as a style, has massively underperformed growth over recent years as investors have preferred the relative safety of companies that can grow in a world where such an entity is sparse – no matter how much they may have to pay for it.
According to FE Analytics, for example, his Temple Bar Investment Trust has lost 5 per cent over three years compared with a 14.25 per cent return from the IT UK Equity Income sector and a 9.82 per cent gain from the FTSE All Share.
Performance of trust versus sector and index over 3yrs
Source: FE Analytics
Though his investment style has been out of favour, Mundy has also been hurt by significant discount volatility. FE data shows, for example, that Temple Bar’s shares were trading on a premium of 3.5 per cent this time three years ago, but that has trended out to a discount of close to 8 per cent today.
The manager admits that it has been a painful few years for his investors, but he adds that he will continue to stick to his guns.
“Value investing does work, but it’s a horrible, miserable experience,” Mundy said.
FE data shows that has certainly been the case for Mundy as, though he has struggled recently, since he became manager of Temple Bar in October 2002 the trust has made 273.95 per cent compared with a 191.47 per cent return from the FTSE All Share.
Currently, Mundy counts the likes of HSBC, BP, Shell, Royal Bank of Scotland, Lloyds and Morrisons as top 10 holdings. Temple Bar has gearing of 4 per cent, yields 4.1 per cent and has ongoing charges of 0.49 per cent.