‘I look for ba­bies thrown out with the bath­wa­ter’

The Daily Telegraph - Your Money - - INVESTING -

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

the mo­ment?

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.


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