In the hunt for cheap stocks

The Temple Bar Investment Trust has posted a lower turnover than its historical 20 per cent this year but manager Alastair Mundy affirms “we are up relative to our peers”

FS Beth Brearley 160 byline

Renowned contrarian investor Alastair Mundy has been particularly picky this year in where he has invested the Temple Bar Investment Trust.

The Investec fund manager says the trust’s turnover was lower than its historical average of 20 per cent this year, with the cash weighting sitting at six per cent.

“We have bought a few stocks but we cannot find much to buy,” Mundy says. “Valuations are full and we are concerned about profits and volatility. It is crazy to chase companies. We are relaxed sitting on cash and are towards the higher end of our liquidity levels. We want lower prices. It could be tomorrow or it could be in years’ time. And it could be individual stocks or the whole market could fall.”

Mundy adds: “All we do is hunt for cheap stocks. There is no timeline for their recovery. Everyone is bad at forecasting everything, we just bumble along. We do not do brave or stupid forecasting.”

The few new purchases which have made it into the portfolio recently include insurance group Direct Line (at the IPO), Royal Bank of Scotland and cruise line operator Carnival.

Mundy says: “Direct Line is a large insurance company in a large, strong bank, which people thought had lost its way. We don’t typically invest in IPOs as effectively the company is asking you to invest, but in this case RBS was the forced seller [European regulators stipulated the bank must sell Direct Line to adhere to state aid rules]. It is a turnaround story. There has been lots of progress to reduce costs and increase profits.

“[We bought RBS because] investors are saying banks are uninvestable, but that is a bit rich. You can make a decent profit in the medium to long term. On 0.4 times book value, it is very attractive.

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“Carnival is part of a duopoly, as there are only two cruise ship players. They have built more ships, and bigger ships, but they are finally slowing down and focusing on profits. We hope this could lead to price increases on holidays and feed through to the share price.”

Launched in 1926, the £613m fund is described by Mundy as a “classic equity income trust”.

At the end of September the trust’s yield was 3.8 per cent end of September, and although Mundy says “we keep a firm eye on increasing dividends in real terms and growing capital,” he is not overly preoccupied with identifying income-yielding stocks.

“Our typical stocks are quite high yielding so the income flows through the portfolio naturally without us having to focus on it,” he says. “We invest nearly all of the trust in UK securities and we typically focus on the FTSE 350, on companies with a market cap of £300m upwards.”

Over the year to 7 November the trust is up 18.1 per cent against the 15.31 per cent average of the AIC UK Growth and Income sector, according to Morningstar.

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“This year we are up relative to our peers,” the manager says. “This is partly due to having no resource stocks; we have never had them. In the bubble years we would never touch them, and even though they are coming down, they are driven by macro style investments.

Notable contributors to performance include two top 10 holdings; jewellers Signet (7 per cent) and consumer goods company Unilever (6.2 per cent).

“About 80 per cent of Signet’s sales are in the US and the company has benefitted from a ‘good recession’. They have strengthened their market share in the US and are number one in the market. Signet is very attractively priced and has a low rating.

“Unilever has been struggling to keep up with its competitors for years. It has been a bureaucratically-run business. But it has changed in the last three or four years and is finally growing quicker than its peers. It is investing in new brands and there is plenty of innovation.”

Mundy admits his decision to steer clear of beverage company Diageo has cost the fund some performance, as has a holding in cosmetics group Avon which has faced a “terrible time”.

“We missed out with Diageo as we do not hold it. It is an expensive stock and people are too optimistic about its future. We have a value discipline, and it is even more over-valued now.

“Avon has not been so good. It was unpopular as its traditional method of selling was seen as outdated, but its competitors have shown that it actually works well and it is just that Avon is not good at it. There is a new management team now, and the company has good potential for a turnaround, but so far it has been costly.”