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16 April 2016

How to achieve contrarian growth with low volatility

We chat with Alastair Mundy, manager of Elite Rated Investec Cautious Managed

Using a combination of equities to drive long-term performance and bonds, cash and gold to reduce volatility, Investec Cautious Managed has a proven ability to outperform in bear markets and has also beaten its sector average in a volatile year-to-date by around 4%¹.

We caught up with portfolio manager Alastair Mundy recently to get an update on how he's steering his investors through some stormy waters.

See our views and research on the Elite Rated Investec Cautious Managed

Disappointing economic growth and debt

Alastair says he and his team believe the most likely future scenario for the global economy is continued disappointing growth. In this environment, rate rises look unlikely and quantitative easing (QE) presumably can't go on for infinity.

Debt has increased substantially in many advanced and emerging economies since the global financial crisis and it has become the source of many of today's problems, he notes, adding it's unclear how a peaceful global correction can be achieved.

Many now consider the chances are rising that central banks will resort to 'helicopter money' (another type of QE in the form of 'free money' to stimulate the economy). However, as Alastair also points out, the more experimental monetary policy becomes, the more we run the risk of creating all sorts of unintended consequences.

Who knows how something like helicopter money could impact investments? Already, there is an increasingly worrying tendency for previously uncorrelated asset classes (especially equities and fixed interest) to synergise in times of crisis.

Read more: You're not as diversified as you think

Gold and silver help boost returns

With this in mind, Alastair says he has moved the fund to a far more cautious positioning over the past four and a half years. He has taken a significant short position in US equities to the tune of 19.6% of his total portfolio², for example. He also likes gold a lot for now, and has likewise upped his exposure to the precious metal over that period.

This has proved prudent looking at returns over 2015 and the start of 2016 especially, as volatility has reigned. In the 6 months to 29 February 2016, physical gold and silver, gold and silver equities, and US index-linked government bonds were the highest contributors to fund performance. Foreign exchange and UK equities were the largest losses.

On the equity front, Alastair is known for his rigorous value investing style, which is how he approaches both the equities portion of the Cautious Managed portfolio and the Investec UK Special Situations fund, which he also manages.

Echoing numerous value managers we've spoken to this year, Alastair says value stocks have been suffering significant headwinds, relative to growth, over the past seven years, but emphasised just how 'cheap' value has now become in the current climate.

Read more: Should you buy value or growth stocks?

Within the equity portion of the fund, Alastair's largest sector weighting is to financials², reflecting his contrarian approach given banks have not exactly been star performers on the global stage of late. But with some cleaning up of company balance sheets and new management in place, Alastair sees opportunities.

New purchases to the fund in the six months to end February included Bank of America, which Alastair says has re-built capital and was able to be bought at around 80% of its tangible book value, and Standard Chartered Bank. He also added to his holding in Royal Bank of Scotland, which he believes still has a good, profitable core.

On the oil front, Alastair states BP appears more focused on capital and cost discipline than Royal Dutch Shell, and while he continues to hold both companies, he has reduced his Shell holdings in order to boost up BP.

Where to next?

¹FE Analytics, Investec Cautious Managed v IA Mixed Investment, TR in GBP, 31/12/2015–05/05/2016, accessed 06/05/2016 ²Investec Cautious Managed, adviser presentation, portfolio holdings as at 29/02/2016

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Alastair's views are his own and do not constitute financial advice.

©2016 FundCalibre Ltd. All Rights Reserved. The information, data, analyses, and opinions contained herein (1) include the proprietary information of FundCalibre, (2) may not be copied or redistributed without prior permission, (3) do not constitute investment advice offered by FundCalibre, (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be correct, complete, or accurate. FundCalibre, shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, this information, data, analyses, or opinions or their use.