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Tesco needs new leadership, says Alastair Mundy

Alastair Mundy, manager of the Temple Bar investment trust, talks about his contrarian investment philosophy and explains why out-of-favour Tesco doesn't merit inclusion in his funds.

Tesco needs new leadership, says Alastair Mundy

Despite a 19% drop in Tesco’s (TSCO.L) share price so far this year, Alastair Mundy, manager of the Temple Bar investment trust, says it would take a big change, like a management shake-up for him to become interested in the stock.

Mundy is a contrarian investor and looks for out-of-favour stocks, which have typically fallen 50% from their peak over the past seven years. Tesco, which reports half-year results tomorrow, may be down on its luck but Mundy says he won’t be buying its shares in the foreseeable future.

He adds that the company isn’t as strong as other retailers and doesn’t generate much cash due to its high capital expenditure on opening new stores abroad.

Mundy also believes the business will need new leadership to solve the its problems rather than relying on existing management.

An ideal environment for contrarian investors?

Despite difficult market conditions Mundy says he’s not finding more opportunities as a contrarian investor and believes there is a lack of quality stocks as listing rules in the UK have become too lax.

He adds that since buying JJB Sports, which he calls one of his ‘worst investment’ decisions, he’s avoiding smaller companies in the portfolio as they can be difficult to get enough information on and can be reliant on key people within management to drive the company forward.

Mundy, who features in Citywire Selection, our choice of the best investment funds, manages a large number of other funds such as the Investec High Incom e investment trust and Investec Cautious Managed and UK Special Situations funds. He believes his ten-strong team is big enough to cope.

Temple Bar currently trades at 994p, a 2.4% premium, to its net asset value (NAV) of 970p. Its shareholders have enjoyed a total return of 19% over the past year and 59% over the past five years, beating the FTSE All-Share total returns of 12% on a one and five year basis.

9 comments so far. Why not have your say?

Eugen

Dec 04, 2012 at 12:53

I always love Mundy as he is so blunt when explaining what needs to be done.

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David Trigg

Dec 04, 2012 at 18:30

Philip Clarke has been a disaster. Not only for shareholders but also for customers the morale of staff is low and the stores are shoddily supplied with products. It may be a good time to buy in the hope that he leaves without a bonus.

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Ian Holmes

Dec 04, 2012 at 18:44

Mundy may be blunt, but I doubt his wisdom and market perception and certainly disagree with his view on Tesco:

Here are Alastair Mundy’s performance figures:

Comparing him to other fund managers

UK All companies: 5 Yrs 19/137; 3Yrs 112/179; 1 Yr 120//210

Global Equities 3 Yrs 112/158; 1 Yr 215//233

Not a stunning performance!

Of the main funds he has managed, the return over 3 years has been:

Investec Global Special Situations – 9.6%

Investec Capital Accumulator – 15.42%

Investec UK Special Situations -25.37%

Investec American – 4.91%

Skandia UK Select – 26.21%

Yes, he delivered a positive return, but even the pedestrian and relatively safe M&G Optimal income delivered 28.09% over the same 3-year period.

The 5-year figures are even more stark with M&G Optimal delivering 61.32% compared to Investec American (His worst) at 2.09% and Investec UK Special Situations (His best) at 39.67%.

I'm invested in Tesco and will ignore Alastair's comments. Tesco is basically sound (Remember Sainsbury's management and delivery troubles not long ago?) and delivers a good progressive dividend. Hopefully (due to unfounded downward sentiment) the share price will drop over the Christmas period giving me another buying opportunity............in the medium to long term Tesco will be a good earner (With acknowledgements to the opposing positions of Neil Woodford and Warren Buffet!).

Buy on weakness is my view!! But what do I know?

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Who Knows ?

Dec 04, 2012 at 20:15

Totally agree with Ian on Tesco, bought some on the last dip and am eagerly waiting another buying opportunity. Interesting performance figures for Mr Mundy that said his performance for TMPL is OKish 1 year nav 5/22, 3year nav 10/23

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Eugen

Dec 04, 2012 at 20:55

The problem is that some of you don't understand Mr. Mundy investment process. No investment manager can produce overperformance year in, year out. In the last few years growth stocks have outperfomed value stocks. So youwould not expect 'value' investment managers to outperform in this period.

The performance from value investment managers was poor in the last three years. As the growth stocks become more and more expensive it is not hard to think that a rotation from growth to value will hapen in the future.

It is not only Mundy affected, Neil Woodford and Anthony Bolton were also affected. In value investing it is very important to distinguish between value stocks and value traps. At this moment it is a value trap, and there is no better person im world to tell you this than Alastair Mundy.

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Ian Holmes

Dec 05, 2012 at 02:53

Point well made Eugen, and of course I do understand the differences in asset classes.We shouldn't "compare apples to pears". The main point I was trying to make though by comparing Mr Mundy to the performance of his peers, is that there may be fund managers out there just a little better positioned than he is to advise, based on his current performance stats.

But on the subject of comparing like-to-like, going back to the Investec American fund as one measure of Alastair's performance -

(you can check it here on Citywire - here's the link:

http://www.citywire.co.uk/fund/investec-american/c17805?section=money)

Discrete yearly (October - October) performances

09/10: Mundy +13.9%; S&P +20.13%

10/11 Mundy -0.41%; S&P +7.06%

11/12 Mundy -3.15%: S&P +15.42%

Out of 102 similar funds he managed the following positions: Total Return (101), Maximum Loss (101), Risk (102) and Sharpe (101), and that's comparing apples to apples, Eugen. An ETF would have done better! The only fund to underperform him was the inappropriately named Nemesis USA Value Fundt! Which means I wouldn't take fund manager Pier Alberto Furno's advice too seriously either.

That brings me to emphasise my other point: two highly admired and respected investors - Buffet and Woodford have totally opposing views on Tesco. These guys have amazing track records - so who's position should we take?

As with all investment decisions, you can read, listen and observe comments from experts, professionals and amateurs alike, (and I am definitely of the latter!) but as always - you can do one of two things with advice......................take it or leave it. (Mine included!)

I'll stick with Tesco for now!

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Eugen

Dec 05, 2012 at 13:08

Ian

Your coment is unfair on Mundy as he has only became a Manager of the Investec American fund on 20/08/2012. The past performance belongs to Thornburg Investment Manager Inc where the fund management was outsourced.

It is interesting that the news that Tesco CEO will review the future of the US operations, which weren't profitable for the begining shows how many problems are with Tesco and only the idea that the CEO is looking into problems has pushed the shares price up.

The difference between Buffett and Woodford is based on the timescale. Woodford is judged quarterly by investors and advisers, Buffett is not judged by anyone so he can take a longer timescale. He may even take Tesco private one day.

So Buffett is not interested to change the management as he wants to buy Tesco cheap not expensive.

There are better opportunity out there than investing in Tesco.

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Ian Holmes

Dec 06, 2012 at 07:38

Hi again Eugen.

I don't mean to be unfair to Alastair by any means and I accept what you say about "length of service" as he has been managing the American fund for only a short time, coming in with a 3-month performance of 16/th in a peer group of 108, which I guess ain’t too bad.

I also accept most of what you say about Buffet and Woodford.......So from a personal point of view, we should consider whether we want to hold Tesco as a good basic investment with good dividends, or cut and run?. Value investing, income investing or opportunism, I suppose. I'm not sure about your comments with regards to Buffett's motives though - time will tell on that one!

So, in order to be a little fairer to Alastair, lets take a look at his peer group within other sectors where he has managed funds for a longer period. We have:

Global Equities 3-year performance: 112th out of a peer group of 158.

(1-year: 215/233 )

UK all- companies: 3-year performance 112th out of a peer group of 179. (1-year: 120/210 ; 5-year:s 19/137 )

I have to say that his risk ratios are usually in the top quartile (although the Sharpe ratio is never anything to shout about!), but over the last year his Investec Global Special Sits fund has shown a negative 0.5% return, while the best of his peers in the sector returned almost 16%. (Over 3-years Alastair returned 14.6% which looks pretty tasty until you realise that Morgan Stanley Global Brands returned a sparkling 47.86% in the same period

I’m not making these points to trash Alastairs competence or ability, after all he is a "Citywire Selection" manager and has been Citywire “A” or “AA” rated for 57 months during the last 8 years (None so far this year though!). So I'll accept that maybe I’m missing something, What I am absolutely sure about is that I would be shooting in the dark trying to do his job.

The point that I’m really trying to make by providing supporting figures, rather than seeming to just shoot from the hip, is that I would take Alastair’s comments about a shake-up in the leadership at Tesco in order to improve performance with more than just a small pinch of salt. (I can almost hear Philip Clarke’s retort with regard to improving Alastair’s Investec funds). I think the article is not an entirely well-balanced or helpful one.

For me, both Clarke and Mundy have some proving to do…..so let’s give them a chance, because sure as “eggs is eggs” I couldn’t do either job. I just observe and make my investment choices, (and grocery choices for that matter)…………..and yes, I missed out on the Tesco opportunity yesterday which wasn’t just double Clubcard points………..the shares rose 10.5p (+3.2%) following the interim statement!. C’est la vie!

And Eugen, yes there may well be better opportunities to increase ones wealth than buying into Tesco shares but. I'll take more than a little convincing that these include any of the funds managed by Alastair Mundy!

Thanks for the exchange of blogs everyone. I've found them quite helpful and certainly thought provoking!

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Dividend Income investor.com

Dec 09, 2012 at 14:29

Tesco's likely retrenchment from the USA is not such a bad thing as it will allow redeployment of resources back into the UK in order to sort out its mess in the UK, and 'manufacture' a return to growth.

Also the likely exit from the USA won't be the last; see more at: http://seekingalpha.com/article/1053371-tesco-s-retrenchment-from-the-u-s-is-not-such-a-bad-thing

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