Only the “nutters” and “lunatics” who have been stupid enough to invest in domestically focused businesses over the past three or so years will benefit from any post-Brexit flood of money back into the UK
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This is according to Alastair Mundy (pictured), manager of the Investec UK Special Situations fund, who is happy to identify himself as one such “nutter”.
In a recent article on Trustnet, Mundy’s colleague at Investec, Simon Brazier, warned there would be no ‘Boris bounce’ if the current prime minister wins the upcoming election and finally signs a withdrawal agreement with the EU, pointing out this would constitute just 1 per cent of the Brexit process.
However, Mundy said this ignores how cheap the UK market looks compared with the rest of the world.
“I would argue there's been a buyers’ strike,” he explained. “If you are a global fund manager sitting somewhere respectable like Athens or Hong Kong, you just can't be bothered to invest in UK equities because there's too much uncertainty.
“I don't really care from a political viewpoint; from a financial viewpoint I just want resolution. And I think just any Brexit will do.”
Mundy believes that finally reaching an agreement with the EU will end the uncertainty that has plagued the UK since it voted for Brexit in June 2016, freeing companies to invest in their business and attracting foreign investors back to the UK stock market.
However, he said that the flow of international money will not make its way into quality multinationals such as Diageo and Unilever which have continued to rally over this time, pointing out “they could have done that for the last three and a half years”.
Performance of stocks vs index since referendum
Source: FE Analytics
Instead, he said that if international investors do come back, they will have to buy domestically focused stocks, “whether it's Lloyds or Tesco or Next or whatever”.
“I think there is a reasonable amount of money that could come in and it doesn't have to be a huge amount,” he continued.
“It's just got to be on the margin. It's just got to be a switch from sellers to buyers and more buyers than sellers.
“Don't forget, the only lunatics left holding UK domestic stocks are nutters like me and given all the pain we are taking, we are hardly going to sell them the first day they go up.
“People could be surprised by how quickly there is a transformation.”
Brexit-related uncertainty is not the only reason why value managers such as Mundy have struggled over the past few years. However, while growth-orientated investors such as James Anderson of the Scottish Mortgage Investment Trust believe it is because we are living in an unprecedented era of disruption, Mundy claimed it has more to do with the low level of bond yields since the financial crisis.
“Lower bond yields are very good for growing companies, as their profits are discounted back at very low rates of interest, but it is not so good for value,” he added.
“Is there hope for bond yields ever going high again? Well, when you start from a negative number, and when you start from a position of bond yields being their lowest in 5,000 years, I think that the odds are with us.”
While Mundy admitted he doesn’t have a crystal ball “as anyone who has seen my forecasts for the last 10 years knows”, he believes a rise in bond yields could be just around the corner, driven by an increase in inflation.
The manager is basing this on the number of politicians offering to “bribe” the electorate with promises of greater spending, which won’t be paid for through higher taxation, but by more borrowing and debt. This would cause the price of bonds to fall, simply because there would be more sellers than buyers.
“That would be bad for many asset classes, obviously anything with bond in its name, but also other asset classes priced off bonds, which are much more your growth-type equities than your value-type equities,” said Mundy.
Performance of indices over 10yrs
Source: FE Analytics
“It almost sounds like we win by default, but I don't care how we win. It is a bit like being a West Ham fan.”
Despite the feeling that we could be on the verge of a value revival, many investors continue to avoid this area of the market. Amid all the talk of the tech giants changing the way we live, John Stopford of the Investec Diversified Income fund said that the value story is a hard sell at the moment given it is predominantly made up of “bombed-out cyclicals that have lost their market, lost their franchise or lost their way”.
However, Mundy said that while “the obituary writers have made a living writing value off” over the past decade, this is how it has always been for him.
“I don't know if I ever got the memo, but I never felt value investing was particularly easy,” he added.
“My whole career, all I have had the chance to do is buy bombed-out rubbish stocks: that is the deal you sign with the devil when you become a value investor.
“You always look at the companies which have got perceived problems and a lot of the time, you look at them and think, ‘yeah, you have got problems, I'm not going to buy you’. But every so often you find a baby that has been thrown out with the bathwater and you buy those stocks.
“To mix as many metaphors as I can, it's about kissing frogs, it's a numbers game and you find those ones that have been sold down excessively.
“And being a numbers game, the more in general that value stocks are sold down, the more chance you have of finding pearls in there,” he finished.
Data from FE Analytics shows Investec UK Special Situations has made 358.97 per cent since Mundy took charge in August 2002, compared with gains of 284.86 per cent from the FTSE All Share and 266.17 per cent from the IA UK All Companies sector.
Performance of fund vs sector and index under manager tenure
Source: FE Analytics
The £1bn fund has ongoing charges of 0.82 per cent.