The likes of First State Asia Pacific Leaders, Somerset Emerging Markets Dividend Growth, the Aberdeen New Thai IT – and even Smith & Williamson Global Gold & Resources – have delivered double digit returns since February, and my core holdings in Trojan Income, M&G Global Dividend and CF Ruffer Equity & General have been as solid as ever.
Performance of funds since Feb 2014
Source: FE Analytics
I found myself checking my portfolio on a daily basis, marvelling at my fund-management abilities, but thankfully remembered the swathe of experts who have warned against the growing complacency among investors in recent months.
Valuations across markets are far from cheap, and with fiscal and monetary tightening on the horizon, I anticipate a tougher time for markets for the next 12 months – and I’m not alone.
There is another big uncertainty in the immediate future as well, which few highlighted as a major concern at the beginning of the year: Scottish independence is just a day away, and at this point in time it could go either way.
History shows us that the best buying opportunities occur when emotions get the better of markets.
This referendum has been one of the most emotional macro events in the UK for some time, and I expect the reaction to be significant tomorrow if Scotland does vote “yes”.
Miton’s George Godber believes sterling could fall as far as 10 per cent if Salmond wins tomorrow, and Scottish house prices by up to 30 per cent.
An overreaction from investors is a real possibility, and I want to be in a position to benefit from that.
Indeed, even if it’s a “no”, the future is far from certain, as Neil Woodford recently warned.
I’ve been thinking about topping up my UK exposure via a deep value manager for a while now and may take the outcome of tomorrow’s vote as an excuse to do so.
These managers specialise in snapping up companies that are unloved by the market, targeting those that they think have been sold off too sharply. Such skills could be in high demand tomorrow.
There are a number of deep value UK managers to choose from, many with stellar track records and experienced, process-driven management teams.
For many years the multi-billion pound Fidelity Special Sits and M&G Recovery funds have been very popular with investors, but given that many of the best deep value opportunities occur within small and mid cap indices, I want a manager with greater flexibility.
Two of the standout performers that are a little bit smaller are the Schroder Recovery and Standard Life UK Equity Unconstrained portfolios, which used the steep sell-offs in both 2008 and 2011 to deliver stellar returns.
The Schroders fund, headed up by Nick Kirrage and Kevin Murphy, has returned a whopping 139.31 per cent over six years, while Ed Legget’s Standard Life portfolio is even further ahead, with 195.34 per cent.
Both are top decile performers in their IMA UK All Companies sector over the period.
Although both teams tick a number of boxes, and most importantly are deep value managers through and through, they both have strong biases in their portfolios at the moment.
Kirrage and Murphy have a big bet on UK retial banks with Royal Bank of Scotland, Barclays and Lloyds in and around their top-10, while Legget is significantly overweight industrials, currently taking a 33 per cent position in the sector.
These overweights may well prove to be well-judged, but I have a lot of exposure to these areas elsewhere in my portfolio and I’m not looking for significantly more.
Moreover, both of these funds are fully invested, seemingly content with the number of opportunities in the market at the moment.
I’m looking for a manager who’s ready to strike and so a decent cash weighting is desirable. This has led me to the £1.3bn Investec UK Special Situations fund.
Alastair Mundy has no obvious bias in his fund – financials are his biggest weighting at 20.5 per cent – and is sitting on just under 9 per cent cash.
While the Schroders and Standard Life teams are certainly experienced, few deep value managers in the UK have as many years in the game as Mundy.He has run the fund and Temple Bar investment trust since 2002, and deep-value portfolios since the mid-1990s.
The manager (pictured) is unimpressed by the value opportunities in the market and has gradually built up a cash position as a result.
He was similarly positioned in 2008, helping him to protect against the downside and then snap up cheap stocks, leading to strong outperformance in the 2009 rebound as well.
Performance of funds, sector and index over 6yrs
Source: FE Analytics
His defensive positioning has contributed to lesser returns versus some of his rivals in recent years, but he is still a top-quartile performer over six years, and ahead of the FTSE All Share and IMA UK All Companies sector average over three- and five-year periods.
Mundy’s ability to protect on the downside and keep up with markets as they rise is a big draw.
As I highlighted in a previous article, defensive funds tend to dominate my portfolio, and Mundy certainly fits the bill.
Investec UK Special Sits lost just 19.38 per cent in 2008, compared with losses exceeding 27 per cent from Schroder Recovery, the FTSE All Share and the IMA UK All Companies sector average, and more than 40 per cent from Standard Life UK Equity Unconstrained.
Mundy also did better in the 2011 sell-off.
The cherries on the cake are that Investec UK Special Sits has the flexibility to build big positions in small and mid caps, including Qinetiq Group, Signet Jewelers and Grafton Group as top-10 positions, and is reasonably priced, with clean ongoing charges of 0.84 per cent.
Thankfully, I’m not alone in rating Mundy.
The Investec UK Special Sits portfolio has an AA-recommended rating from Square Mile, meaning he is regarded as one of the best in the business.
“This fund is managed in a patient and contrarian manner with a focus on downside risk,” the team said.
“We have a high regard for Mundy and his team. They are seasoned investors with an investment process that has been successfully applied over time. It is somewhat unusual to find an investor with such a clear cut, focused and consistent approach.”
“By retaining this focus, Mundy is able to avoid being distracted by the constant noise of the market and media and to focus on where he adds value most effectively.”
Square Mile warns that the contrarian focus of the fund means that it is susceptible to periods of significant underperformance versus its benchmark, pointing to the last two years as evidence of this.
The fund should be considered a long-term holding as a result, the group said.
Whether or not the referendum presents a possible buying opportunity for investors tomorrow, I’m ready to buy a holding in Mundy’s fund.
Markets tend to fall when you least expect them to, with an interest rate scare or rising geopolitical risks two of a number of possible catalysts in the coming months.
What do you think of my choice? Are you getting ready to buy a fund when or if markets fall? If so, tell us your choices in the comments section below.
