Mark Dampier: Now's the time to be unfashionable
Saturday 14 March 2009
I think it's fascinating that we are now starting to see the first newspaper articles heralding the death of stock market investing. In a sense it's understandable, since few investors have made money over the past 10 years. I expect to see more articles in future with headlines such as "The end of equities" – I say bring them on. The more I see, the more bullish I will become; in my experience a contrarian strategy of buying into areas that have become deeply unfashionable often pays off.
One fund that encapsulates this concept is the Investec Global Special Situations Fund. It was launched in December 2007 and the lead manager is Alistair Mundy – although with seven investment professionals in the team he would no doubt say it is very much a group effort.
As I said earlier, once an investment becomes unwanted, unfashionable and unloved it is often the time to buy it. Unfortunately, that is difficult to do from a psychological point of view, as we have a natural instinct to invest in popular areas that we see everyone else piling into.
How does Mundy translate the contrarian philosophy into practice? Well obviously he invests globally and will focus on sectors or themes that are out of favour. However, this differs from many other funds in that it has a much longer holding period (three to five years or more), compared to the horizon of just a few months that some other managers have. This is important because often it will take a while for the wider market to recognise the worth of these unfashionable sectors. The fund also takes a very different approach in terms of stock analysis; it really looks to feed off investors' boredom. The team first screen the market for shares that fell more than 50 per cent over a five-year period, but exclude those that have fallen a lot in the past two years. This helps it avoid areas that are currently still in freefall and focus primarily on those that have lost the attention of investors.
Quite often the share will exhibit no obvious catalyst for an immediate turnaround, so at the time of purchase the holding might well appear to be in terminal decline. However, the screening process will also highlight companies that appear well placed to survive over the long term, which when combined with the fund manager's own in-depth analysis should help to steer the portfolio towards areas of the market that will eventually recover.
The focus today is on companies where the business model is easy to understand and the management has a history of working through a recession. In addition, the Investec team look to avoid indebted companies even if they otherwise appear strong; debt kills you in this type of environment.
So where is the portfolio focused at the moment? The biggest bet is in gold mining, which represent the four largest holdings in the fund. This includes Newmont, Kinross, Gold Fields and Barrack Gold. In addition, Mundy has positions in index-linked gilts, held to guard against higher inflation and the possibility of lower economic growth too. The gold position in total is quite large at around 25 per cent of the portfolio, but there is no point in having an insurance policy if you don't put enough money in to it.
Geographic weighting is mainly a product of the individual stock picking rather than an over-arching policy. Nevertheless, the largest weightings are North America at 45.8 per cent, Japan at 15.7 per cent and the UK at 14.8 per cent.
The fund may be relatively young but it has got off to an extremely good start having fallen only 18 per cent since its launch, against a 35 per cent slide for the average fund in the sector. Although of course past performance isn't a guide to the future.
It is understandably difficult for investors to take a truly long term approach at the moment. If you can manage it, however, stock markets probably represent good value, although they aren't necessarily dirt cheap. This is the kind of fund that would suit a patient investor who doesn't like following the herd.
Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit www.h-l.co.uk/independent
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