Investec Cautious Managed - value approach returns to favour

Kate Marshall | Mon 06 March 2017

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• Alastair Mundy focuses on unloved and undervalued areas of the market
• Almost 60%, the maximum permitted, is currently invested in shares; the manager has a cautious outlook for bond markets
• Manager’s value-focused approach has been rewarded over the past year

Our view

Alastair Mundy, manager of the Investec Cautious Managed Fund, is a natural contrarian. He seeks areas of the market he believes are unloved and undervalued, but where he sees a recovery on the horizon. This approach has yielded good long-term returns, although it results in a portfolio that looks quite different from its peers and means it can go through periods of underperformance.

The manager’s value-focused approach was out of favour for several years prior to 2016, and this led to a period of weaker performance. It has paid off more recently and investors have been rewarded over the past year, although please remember past performance is not a guide to future returns.

This fund does not feature on the Wealth 150 list of our favourite funds across the major sectors as we feel we already have a good line-up of mixed-asset fund managers on the list. That said, we view Alastair Mundy as an experienced investor and believe he has the ability to add value for long-term, patient investors.

Past performance is not a guide to the future. Source: Lipper IM to 28/02/2017

Portfolio review

Shares – 59.7%

Amid economic uncertainty and low interest rates, higher-quality growth stocks have been favoured by investors in recent years for their defensive characteristics and stable earnings. Alastair Mundy typically avoids this type of company and his focus on out-of-favour companies held back performance for a number of years.

Since mid-2016, there has been a shift in the performance of previously-popular growth sectors, such as consumer goods, healthcare, and technology, towards once-disliked and lowly-valued sectors, including financials and commodity-related industries. The fund’s focus on undervalued areas of the market has come to fruition over the past year and boosted performance.

Alastair Mundy currently sees value in the shares of banks and UK supermarkets. In his view the increasing regulatory pressures faced by banks in recent years are beginning to subside and they can now focus on improving their profits. Investments in Barclays, Lloyds, RBS and Bank of America currently feature in the portfolio.

After struggling for several years against competition from discount retailers such as Aldi and Lidl, the manager feels larger supermarkets are now in a stronger position since cutting costs and prices, and improving the quality of their products and customer service. An investment in Sainsburys was made last year, which he feels could also benefit from its acquisition of Home Retail Group (owner of Argos).

The manager also holds a 'short' position in US shares, which could offer some shelter if the US stock market falls in value. A combination of high and unsustainable valuations, and low earnings growth, could lead share prices to fall, in the manager’s view. The use of shorting, as well as other derivatives, adds risk as the fund can fall in value if the manager makes the wrong calls.

Bonds and cash – 30.4%

Bond markets have generally performed strongly in recent years – as bond prices rise, yields fall, and the manager believes bond yields are now at unattractively-low levels. The fixed interest portion of the fund is cautiously positioned and focused on bonds with a shorter date until their maturity.

Alastair Mundy is also conscious of the amount of debt that has accumulated across the globe. In his view the most obvious way for the value of this debt to reduce is for inflation to rise. This is bad for conventional bonds as inflation erodes the value of the fixed-interest payments. The fund is therefore also invested in inflation-linked bonds, where interest payments are linked to changes in inflation.

Commodities – 9.9%

This portion of the fund is focused on physical gold and silver and helped performance over the past year against a backdrop of rising commodity prices. Gold is also traditionally seen as a store of value that is not impacted by the effects of rising inflation, for example. The shares of some silver and gold mining companies are also held in the portfolio.

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.