Shopping in other people’s dustbins doesn’t sound like the most attractive prospect at the best of times. However, that’s exactly how Investec’s Alastair Mundy describes the approach he takes to buying shares for the Temple Bar Investment Trust.
Heading up the trust since 2002, Mundy employs a disciplined investment process focused on making long-term investments in cheap, out-of-favour companies he feels the market has unfairly cast aside.
He begins by running companies with a market capitalisation over £200 million through a screening process to highlight the weakest performing shares. Once identified, the significantly underperforming stocks are examined, with special attention given to their valuation, the strength of their balance sheets and the inherent risk they carry.
A detailed analyst report and subsequent peer review allow Mundy and the team to decide which opportunities have the potential to be added to the trust.
Swimming against the tide
Contrarian investing can be a lonely pursuit, and for fund managers judged on their performance, sometimes it’s easier to fail along with the crowd than stick to a view that goes against consensus. What’s more, the nature of this deep value investing means buying into an unattractive story that has the potential to be uglier still.
The skill here is in differentiating those companies that are cheap for a reason from those set to bounce back - but this takes time. Arguably this is one of the main advantages of using an investment trust to employ this approach.
As the fund is closed-ended, meaning Mundy doesn’t have to worry about constant inflows and withdrawals, the manager can put capital to work knowing he won’t have to compromise his strategy to meet redemptions. As turnaround stories can take time to come to fruition, this ability to wait should not be underestimated.
And that’s not the only advantage of the closed-ended set-up Mundy enjoys.
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The 92 year old trust has a long-term track record of dividend growth, and in 2018 increased its dividend for the 35th consecutive year. This growth has been achieved despite some years of low dividend growth in the underlying portfolio, notably in 2000 and 2009 when many companies were actually reducing their dividend. Mundy has been able to continue this record thanks to the trust structure, which allows management to conserve surplus income when the going is good, in order to smooth payments to investors in periods when income is hard to come by.
This puts the Temple Bar portfolio among the trusts labelled Dividend Heroes by the Association of Investment Companies (AIC) - a small number of investment companies to have increased their dividends each year for 20 consecutive years or more.
For investors looking to diversify their portfolio with exposure to a true contrarian strategy, Temple Bar may be attractive.
As investors, we often fall into the trap of identifying a cheap stock but dithering when it comes to deciding if it is actually good value. This is where it can be worth outsourcing the heavy lifting to the professionals, with analyst teams like Mundy’s answering the difficult questions for you.
More on the Temple Bar Investment Trust
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.