Going against the crowd

Imagine a photograph of five zebras standing in a line, four facing towards the camera and one showing the camera its generous behind. This was the light-hearted image Investec chose to introduce Alastair Mundy, its star UK equity manager, at a press briefing last year: as the man not afraid to go against the crowd, and as the ultimate “contrarian” investor.

I was curious to meet the man behind the image away from the showboating of a formal presentation. What I find is a man with a winning tendency to satirise standard fund manager assumptions, aided by the comic potential of an estuary accent and a high, reedy voice.

Relating how in 2007 his core holdings in UK retailers were trampled under a market stampede into “decoupling” stocks, Mr Mundy says: “Everyone was getting worried about the US and UK recessions, but don’t worry about the rest of the world because – what’s it called? – globalisation will keep China going, and that sort of thing,” waving his hand as if spinning the market yarn.

Then he switches tack. “So, no one wanted our retailers – and perhaps with good reason.”

One of the pretensions Mr Mundy happily rejects is that fund managers don’t make mistakes. “That’s why we have a portfolio – we know in any portfolio a certain percentage of our ideas are wrong!” he exclaims when asked whether he finds fund management an all-consuming profession.

“If you accept that, you’re not driven mad by your failures. If you’re a brain surgeon and you’ve had a couple of bad operations, you might worry about your failures – your success rate needs to be higher. But fund management is a brilliant industry where you can fail, and you’re allowed to talk about it and learn from it.

“The strange thing is, no one does like to talk about their failures. I don’t know why we have to pretend all the time we’re brilliant, because quite clearly we’re not – the numbers are there to prove it.”

Mr Mundy’s philosophy reminds me of the famous prayer adopted by Alcoholics Anonymous: grant me the serenity to accept the things I cannot change, the courage to change the things I can and the wisdom to know the difference. His process is based on a careful appreciation of what he can control and what he cannot, what he can know and what he cannot.

The way he introduces his team’s contrarian process is a well-rehearsed exercise in this kind of humility.

“We start from the premise that fund management is very difficult,” he explains. “We understand we’re competing against intelligent, well-informed and well-resourced people, so to believe we can outperform them by being better than them at any stock we pick up strikes us as extraordinarily arrogant and naive.”

How, then, does the manager try to add value? He must think he can outsmart his peers in some way – otherwise his impressive track record on the UK Special Situations fund would, to follow the logic through, be pure luck.

Mr Mundy’s somewhat contradictory answer is that he focuses on “where our competitors act most irrationally”. He may not try to outsmart his peers by buying “better” stocks, but he does try to outstare them on “bad” ones – and so outsmart them in the long run. In other words, he is prepared to buy unloved stocks when they are falling and hold on to them for long enough for the market – hopefully – to reappraise them. The game, he implies with self-confident modesty, is one of psychology, not intelligence.

He explains: “I think there are three styles of investor – one who thinks there will be more opportunities as the stock goes down, another who’s very happy to buy more of a stock going up and a third who tries to be both.

“My team’s DNA is that we’re comfortable buying more of a stock when it’s going down. That can be very uncomfortable – it’s uncomfortable for everyone, including us. What everyone else is doing is viewed as so obviously correct that you’re sitting in the corner with your dunce’s cap on. But we’re comfortable with that uncomfortableness.”

This is what Mr Mundy understands by a contrarian process. But he agrees the word is overused and points out that I, not he, was the one to first use it in this interview.

“I don’t push it these days,” he notes. “The opposite is something like ‘consensual’ and you can’t say you’re a consensual investor. So everyone claims to be contrarian. I think our definition is the classic description. Other people use it to mean they’re doing something ‘different’ – which I don’t think makes you contrarian.”

One hallmark of the true contrarian, Mr Mundy stresses, is protracted periods of underperformance. Now Investec UK Special Situations is at the top of the three-year performance charts. But two years ago it was at the bottom, as a result of what the manager refers to as the “mining bubble”.

It is a close call with the technology-led rally of 1999, but the manager says that on reflection the mining bubble of 2006-07 was the most uncomfortable period he has ever managed money through. “It could have gone a lot further and our performance could have got a lot worse,” he reveals.

Yet, with one eye always on the upside, Mr Mundy is also aware that such bubbles are at the very heart of his philosophy. “As horrible as they are, we need those periods. They’re the best periods we have to refresh the portfolio – they give us all these irrationally priced stocks. Do I want another bubble? Yes I do!”

Spoken like a true contrarian.