Alastair Mundy, manager of Investec UK Special Situations, yesterday won Morningstar's UK Equity Fund Manager of the Year Award. In an interview recorded at the awards ceremony, Mundy describes what makes a true contrarian investor, explains how having rules helps to prevent emotional decisions, and tells us he's so happy with the portfolio at the moment that it's now a game of patience: he can imagine spending the next five years watching England play cricket and then checking back to see how it's performed.
Holly Cook: So the first thing to say is congratulations on your award, how does it feel?
Alastair Mundy: Thank you very much. It’s great – it’s very nice to receive the award and I think it’s a reflection of all the hard work put in by the guys in the contrarian team at Investec, so we’re very pleased to get it.
Cook: You’ve been at the helm of Investec UK Special Situations for coming on 8 years now and your contrarian investment style has seen the fund outperform peers time and time again. Obviously you’ve always been going against the flow, buying stocks that other people hate, you must have taken a fair amount of emotional bashing, particularly at the beginning of your career—how do you stay immune to that?
Mundy: [Laughs] That’s a good question! I think you’re hard-wired to it. I think if you’re that way inclined, you’re hard-wired to be comfortable buying shares which everyone else or the majority dislike. And you can handle that sort of uncomfortable period where the shares typically go down after you’ve bought them, and keep your confidence, and perhaps buy some more if you think they’ve got cheaper. I think you can always pretend to be a contrarian but a real contrarian is someone who’s got the nerve to keep buying if they do think they are right.
Cook: So, your strategy is that you look for companies whose shares have dropped 50% or more but not in the last two years.
Mundy: Yes.
Cook: So obviously you have to remain patient for that time period—do you ever want to break your own rules?
Mundy: Yeah, absolutely! I think you can’t resist it. Every now and again you think “Oh, it’s worth breaking the rules because this is a special share” and history will tell us that every time we do something like that it wasn’t worthwhile after all. The rules are there for a reason and we work within that, and I think that is best. It means it’s quite a harmonious relationship within the team as everyone knows what the rules are.
Cook: So, two years ago you changed your strategy. You went from looking for companies that had lost 30% or more to those that had lost 50% or more. That change came just before the collapse of the financial system. What did you know that we didn’t?
Mundy: [Laughs] I don’t know, it was just complete luck. We just thought we weren’t being contrarian enough, frankly, we just thought shares that had fallen 30% would have hurt the people that were holding them but not hurt them so much that they were necessarily really capitulating—really feeling the pain. We felt that if we were buying shares that had fallen by 50% that would really sort out those people that had completely given up on the stories and give us a chance to buy from irrational sellers—sellers who’d just had enough, taken so much pain they couldn’t take any more. And that’s why we did it, it was just luck that we did it at that point and we’re very pleased we did.
Cook: So, particularly at the end of 2008 we saw some really severe losses in the market. That was almost two years ago now so are you excited about how this year’s going to pan out? Do you see possible fund candidates coming onto your radar in the next 12 months?
Mundy: Um, I guess we’re not really clever enough to see the next 12 months. We like the portfolio, we think the portfolio’s much better quality than it’s been for many, many years. And it’s the sort of portfolio, I’ve been saying recently it’s the sort of portfolio that I’d be happy shutting up shop and going and watching England play cricket for the next five years and come back and then see how the portfolio’s done. It’s a portfolio where, I think there are a lot of super-tankers that are turning in there and the hard bit’s going to be just holding on and not dealing—back to the patience rather than selling too quickly and patting ourselves on the back. So, no, there’s not too much exciting stuff coming into the portfolio but the stuff that’s in the portfolio, we’re very excited about.
Cook: So no particular areas that you’re really, kind of, looking hopeful for for 2010?
Mundy: No, as always, we’re sort of well spread all across the place and it’s that balance and the diversification of out of favour stocks across out of favour sectors, which, you know, we’re happy to find value in lots of different places and we try not to have favourites because favourites usually disappoint you.
Cook: [Laughs] Right. Obviously you have an extremely successful track record. What is it about the culture of Investec that makes you stay there?
Mundy: I think they just let us do what we love doing. They don’t drive us mad, they leave us alone, they encourage us when we’re struggling and they pull us in when we’re doing better. And they’ve allowed me to build a big team of the people I wanted to employ, who thought in a like-minded fashion. And I think it’s that support that you need from employers—and employers who, when you are underperforming, they don’t criticise your performance, they question your process and that’s really what makes Investec stand out for us.
Cook: You mentioned the attitude of your team players—I know that you hand pick your team, are there any core competencies or core skills that you look for when you’re looking to build your team?
Mundy: No, I think the only core skill that we like is the happiness to be more interested in buying shares as they fall in value. And as strange as it sounds that finds a very small minority of people just from that screen on its own and I think it is the thing that binds us together most: that we’re all like-minded in that way.
Cook: So, my final question for you is, I understand that West Ham United hold a special place in your heart. You’re obviously not a glory hunter as they’re sitting in unlucky 13th in the Premiership at the moment.
Mundy: [Laughs] That’s cruel.
Cook: [Laughs] Given that they’ve consistently underperformed, say, my home team Arsenal, if West Ham was a publicly-traded company and their league results were a proxy for its share price, would you consider investing?
Mundy: I think we’re happy on a whole leaving it to Icelandic bankers and magazine entrepreneurs, shall we call them.
Cook: ‘Special’ magazine entrepreneurs.
Mundy: ‘Special’ magazine entrepreneurs, yes. [Laughs]
Cook: Well, thanks very much and congratulations once again.
Mundy: Thank you very much and thank you to Morningstar for the award, very kind.
