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Being contrarian: Alastair Mundy rejects four common clichés
by Robert St George on Sep 27, 2013 at 12:44
Citywire Selection manager Alastair Mundy, who heads the contrarian team at Investec Asset Management, warns against buying into 'investment clichés'.
Citywire Selection manager Alastair Mundy, who heads the contrarian team at Investec Asset Management, has warned against accepting the received wisdom that abounds in markets, which he dubs ‘investment clichés’.His Investec UK Special Situations fund is up by 48.8% over the three years to 20 September, compared with an IMA UK All Companies sector average of 40.2%.
Here he gives his view on four common clichés circulating the investment worldOne of the oldest sacred cows Mundy put to the knife was that equities always outperform over the long term.‘There are frighteningly long periods of time when, even adjusting for dividends, you do not make any money,’ he said.As examples, he cited the dismal decades for the FTSE during the 1960s and 1970s and the 80% peak-to-trough losses in Japan from 1990.‘You will never, ever get that money back,’ he noted.Mundy also rejected the notion that thematic investing is a viable strategy, no matter how attractive it superficially seems to ride that theme. ‘However straightforward the themes look, they tend to be wrong,’ he said.He recalled the dotcom crash as an instance when a theme – the rise of technology – was accurate but not necessarily a wise investment thesis. ‘The big picture can be completely correct but the outcome can be completely shocking.’Among the mistaken assumptions currently circulating markets are the notions that the financial crisis is over and that US equities are attractive, Mundy felt.‘We’ve basically been playing pass the parcel with the debt,’ Mundy said of the first contention, as the greatest liabilities have shifted from banks to governments without truly being resolved. ‘That’s going to be a long, painful process,’ he warned.A graver concern was the lack of wholesale change at the top of the political, regulatory and financial spheres. ‘The guys in charge now were in charge on the way up,’ he said. ‘It’s like the addicts being in charge of the drug dependency units.’On the US, Mundy acknowledged the market was presently enjoying a ‘golden period’. However, he attributed this to the unusual confluence of a lenient tax regime, record low interest rates, weak growth in wages and the boost provided by quantitative easing.This had all conspired to make US equities particularly frothy, Mundy said. He estimated that current values were among the 5% most expensive periods in the S&P 500 index’s history, judged by the Shiller price-to-earnings ratio. By his calculation, US shares are 30% overvalued compared with long-term averages and 80% overvalued against long-term lows. ‘And 80% down is much, much more likely than 80% up,’ he added.The manager nevertheless admitted he could still be tempted into US stocks: ‘I’d buy at 45% down, so I’d get carried out too.’