The £1bn Investec UK Special Situations fund’s lacklustre few years has been driven by the poor relative performance of out-of-favour value stocks, its manager Alastair Mundy notes, who firmly believes his contrarian investment style will now start to pay off. 
Mundy is one of the most well-known managers in the IA UK All Companies sector, with his Investec UK Special Situations fund having previously been one of the go-to destinations for both private and professional investors wanting exposure to the UK equity market.
However, while the fund has comfortably outperformed its peers and the FTSE All Share over the longer term, Investec UK Special Sits has endured a very tough run over recent years.
According to FE Analytics, the fund has underperformed against the sector average in each of the last four calendar years and its benchmark in the last two. This means Investec UK Special Situations is now a third-quartile performer over one, three and five years and down against the index in the latter two time frames.
Performance of fund versus sector and index
Source: FE Analytics
It seems that many investors have begun to lose patience with the fund, with Investec UK Special Situations among the 10 most sold funds in the IA UK All Companies sector over the past 12 months as some £273.5m has been redeemed.
Mundy, who has managed the fund since August 2002, admits that it has been a very unpleasant few years.
“We’ve had a pretty tough/rubbish couple of years. We are busy digging ourselves out of the hole at moment as sentiment within the market has started to change over the last couple of months,” Mundy (pictured) said.
He says his relative underperformance has come about because he takes a distinct value/contrarian approach to equity markets – a style which has considerably underperformed the likes of growth stocks over recent years as investors have bid up the price of companies with more defensive characteristics.
Relative performance of indices over 3yrs
Source: FE Analytics
Though certain ‘value’ funds in the UK space have still managed to outperform despite this style headwind – such as CF Miton UK Value Opportunities, MFM Slater Recovery and Man GLG UK Income – Mundy says his fund has struggled given he has a very strict valuation discipline and will normally focus on mega-caps.
He added: “Value investing is something you hear people talk about and no one actually ever describes it.”
In fact, Mundy and his team will only back stocks that have fallen 50 per cent from their share price peak over the past seven years – a strategy that has worked well for him over the longer term.
“It means we focus on stocks when they are going down and that’s when people start doing some very strange things. When something has fallen 30 per cent, 40 per cent or 50 per cent, you tend to have clients moaning at you, your boss moaning at you and you colleagues laughing at you behind your back.”
“The easiest thing to do at the point is sell the share and move on and that’s where we come trotting along and say, well everyone else is selling that share, can we see some good in that company? These people owned this company three or four years ago and bought it thanks to some good news, so is the good news still present and can it drive the shares in the future.”
He admits that that this process has not worked well at all over recent years though, as areas of the market that were cheap have stayed that way for some time now due to macroeconomic headwinds. These include miners, oil stocks and financials.
Performance of indices over 5yrs
Source: FE Analytics
Financials and oil stocks have played a prominent role in Investec UK Special Situations for a number of years, while FE data shows Mundy has been increasing his exposure to basic materials over the past 12 months.
“Sometimes it feels great [to be a value investor] and sometimes it feels absolutely atrocious. For a number of years it’s felt like a real ugly place to be,” he said.
“However, over the years, value investing has proved its worth. The last few years have been very tough as a value investors because if you managed to avoid the resource stocks, you might still have held oil or you might have had the financials. Unfortunately, they’ve been the three areas where value has been ever present.”
“It means we’ve had this headwind to deal with and, as a result of that, we’ve really struggled in performance terms.”
As Mundy notes, his value style has worked well over the longer term – even though he has had to endure periods of underperformance.
FE data shows that under his stewardship, Investec UK Special Situations has returned 239.57 per cent, beating the sector and FTSE All Share by 50.96 percentage points and 58.72 percentage points, respectively, in the process.
Though that includes five calendar years’ worth of underperformance relative to the index and seven relative to its sector, Mundy’s fund was top quartile in turbulent years such as 2008 and 2011.
Performance of fund versus sector and index under Mundy
Source: FE Analytics
There are also signs that Mundy’s persistence is paying off, with Investec UK Special Situations sitting comfortably in the sector’s top quartile and ahead of its benchmark in 2016 so far with gains of 0.92 per cent. Its average peer, on the other hand, is down 1.73 per cent year-to-date.
Mundy, like other managers and analysts FE Trustnet has spoken to recently, insists that the outlook for value investing, and his style in particular, is very bright.
“Where are we now in value? How cheap do value stocks look relative to the market? If you look in terms of P/E ratios, dividend yields and price or put all those three together, value stocks look as cheap as they have done at point in time over the last 40 years.”
It must be noted that Mundy’s underperformance over recent years hasn’t just been due to his exposure to commodities or financials, with certain industry commentators criticising his decision to hold high levels of cash (his weighting has regularly reached more than 10 per cent over the past three years), moving into supermarkets far too early and using shorts on the S&P 500.
Nevertheless, the managers has some notable backers.
These include Marcus Brookes, head of multi-manager at Schroders, who uses the fund across his fund of funds range. Brookes has chosen the fund as one of his favourites this year due to Mundy’s experience and genuine value tilt.
“[Mundy] has a contrarian value bias, which we think is attractive at this stage of the economic and market cycle. Broadly speaking, the value investment style has been out of favour and underperformed growth over the last five years,” Brookes said.
“However, we are starting to see an environment in which we think value investing could make a comeback. We think the potential in this portfolio could be about to be realised and it has already been adding value in what was a rough start to 2016 for markets.”