‘I look for babies thrown out with the bathwater’
Last week a wave of worry hit stock markets around the world, sparked by fears of rising interest rates in America. But in periods when investors panic and sell, value investors swoop in. Alastair Mundy, of Investec UK Special Situations, is one such value investor. He tells Telegraph Money what buying opportunities he looks for during periods of stock market volatility.
Who is the fund for?
It is for those investors who want some of their portfolio invested in cheap, UK-listed recovery stocks – those that have fallen in price but show potential of recouping. We’ve found our clients see it as a nice complement to other styles of funds, such as growth or quality investing.
How do you pick your holdings?
We look at the FTSE 350 for stocks that have underperformed most over the past seven years. Then we ask, “which are cheapest relative to their current recovered level of profits?” A firm that has underperformed for seven years probably has profit levels that are not as high as they have been historically.
Our question is: can those profits recover to previous levels and how much am I being asked to pay for those profits? If we can buy into those recovered profits very cheaply, then those are the sort of stocks we want.
We also ask about the downside risk. Has it got a lot of debt? What is its corporate governance and management like? Has it got structural issues that suggest the profits won’t bounce back?
How do you invest amid the current stock market volatility?
Volatility increases the chances of investors doing something irrational. So you hope a few babies have been thrown out with the bathwater. That is what we’re always looking for.
Which sectors do you like at CV: Alastair Mundy
Alastair Mundy y has been sole e manager of Investec UK Special Situations since nce August 2002. . Since the same date he has also been
We are most exposed to three sectors. One is UK banks, where we hold Lloyds, Royal Bank of Scotland and Barclays in particular. The view is, quite simply, that it’s become a pariah sector. We say these companies have changed very significantly in the past decade. Management is new and the balance sheets are better. They’ve paid all their fines, they’re highly regulated, they’re highly profitable institutions. Banks were the epicentre of the last crisis but we think it makes sense to look somewhere different for the next one.
We are also heavily invested in UK retailers, particularly Next and Marks & Spencer, where we think prospects are OK.
We are also quite exposed to the maintenance and home improvement sector through builders’ merchants. When housing transactions pick up, we think these sort of companies will be big beneficiaries.
This £846.9m value fund claims to go where others fear to tread. Sam Barker asks Alastair Mundy about his approach
Which sectors do you avoid?
In general it’s factors, not sectors. We avoid areas we don’t understand, and we are not at all attracted to complexity, we much prefer simplicity.
We don’t like areas where the balan balance sheet restricts management’s abilit ability to invest for recovery. Some Sometimes you see a balance sheet so str stretched that the management team only has a year to turn the busin business around before becoming over overcome by debt. We avoid areas with weak corporate governance and where we don’t think the risk/reward profile is in our favour.