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6 May 2016

Investing in equity 'fixer uppers'

We chat with Alastair Mundy, manager of Elite Rated Investec UK Special Situations

We're all familiar with a fixer upper when it comes to property. Buy a place that's pretty run down but that you believe has got potential and get some great people in to help sort it out. A 'value' investing fund is the same kind of concept except it buys companies instead.

Learn more: What are value and growth companies?

Elite Rated Investec UK Special Situations is one such example. Its manager, Alastair Mundy, has been at the helm for more than a decade and has made a name for himself with his rigorous selection process that has generated strong returns for investors over the years.

A slow but steady turnover of the portfolio is crucial to success, Alastair says. A fund like this one needs to be careful it maintains a good blend of companies and sectors with different characteristics and at different stages of recovery.

We asked Alastair what he's been buying and selling recently.

See our views and research on the Elite Rated Investec UK Special Situations

Banks, building materials and supermarkets

The fund currently has an 80.6% weighting to UK equities, a 12.6% weighting to cash and corporate bonds, and a 6.9% weighting to international equities. As is the case in Alastair's other Elite Rated fund, the lower risk Investec Cautious Managed, however, he is also 'short' the S&P 500 (the US stock market).

Banks, building materials and supermarkets are major themes in Alastair's Special Situations top 10, and Britain's two major oil players, BP and Royal Dutch Shell, also make the cut.

On the subject of banks, in particular, Alastair was very clear on the reasons why he is contrarian. While acknowledging there remains room for improvement, he says banks are far more transparent than they were coming out of the global financial crisis.

What's more, he believes we may finally be approaching the end of the period of “never-ending” unexpected fines, with the list of forthcoming fines now “fairly comprehensive”. And while there is much talk of banks' vulnerability in an economic downturn, the UK banks have at least been stress-tested for a deep recession, he says. Other sectors haven't.

Across the portfolio, however, valuation discipline remains key. Alastair says he recently sold his position in Carrefour (the French supermarket) as the shares had re-rated, making it no longer obviously cheap versus struggling peers. Holdings in British American Tobacco and GlaxoSmithKline were reduced for similar reasons.

Explaining other reasons that might prompt him to sell his stake in a business, Alastair said keeping an eye on balance sheets was key. He only ever buys companies whose balance sheets are in good shape, and if these conditions weaken, the potential downside risk on the stock increases. Confidence in management's competence is also very important and if this diminishes, he will likewise sell.

Where to next?

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.

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