Hello I’m Emma Wall and talking to me
today is Alastair Mundy, manager of the Temple Bar Trust. Hi Alastair. Hi Emma So I thought
we’d start with a bit of background about value and growth. Now people know that value and growth have gone in opposite directions over the last few
years but it seems, in value in particular, there’s been a wide range of
outcomes. Whereas all of growth seems to gone up, in value there’s some that
have done not too badly in the last couple of months, yourselves included, and others that haven’t and I was just wondering about what you thought the
reasoning behind that was? Yeah it’s because you can look at value in lots
of different ways and it’s all ultimately a judgment call – we could all
see superficially which are the cheap stocks, which is what a value investor
does – but beneath the surface there might be a lot of debt in those companies, some
might have structural issues, some might have management issues. So, you
know, you can you can buy 50 value stocks and they can have very differential
performance between them. And in the last couple of months there has been a bit of
a recovery within value among certain names and you have benefited from
that. What names are they and what do you think is driving that? Yes I think it’s been very much for us it’s been the UK domestic stocks, companies that make the
majority of their profits in the UK. And I think part of their recovery has been
because they’ve been so weak, there’s effectively been a buyer strike since
the Brexit vote in 2016. These stocks, the underlying companies haven’t done
particularly well so that hasn’t attracted too much interest and
also buyers, when they’re based in the UK, but perhaps particularly overseas,
hear and read about Brexit and think ‘we can’t deal with this uncertainty so we
won’t buy those stocks’. And I think those stocks just simply got so low, so
oversold, that they were they were providing a very attractive opportunity. Almost, perhaps, who knows how Brexit is
gonna play out, but they were already discounting a very bad Brexit. And so
as often happens with value stocks they bounce before any of the new good
news comes. You know, we’ve often found historically if you want to wait for the
certainty and the good news you have to pay a huge amount more for that, and once
again, so far, these stocks have bounced early before there’s been been
much good news. And I suppose it’s your job to work out what the fundamentals are and what’s important because, where real value
lies, because trying to palette predict political outcomes is near impossible isn’t it? Yeah that’s right and one of the things in terms of Brexit is we’ve just called
it a recession and then and we’ve seen a number of recessions before so we asked
ourselves how how cheap will this company be over the long term, assuming there’s a recession fairly soon. So we try and take the emotion,
perhaps the political emotion, out of the decisions. And can it get
through that recession has it got the balance sheet, has it got good enough
management making the right decisions? And so yes we always appreciate
every stock we hold it can be a rocky road and so the conditions are
no different it’s just we can identify how rocky this road’s going to be, or at
least what the rocks look like. We always have to try and cope with
uncertainty And although there has been a bit of a bounce we’re still talking
about from quite low levels so presumably there are still quite a lot
of opportunities out there for value investors? Yes I think what we’ve seen so
far perhaps is a bounce back from value being very oversold. So yes it’s early days for a value recovery and I think what perhaps is needed for an elongated value recovery is it’s a change in bond yields, and bond
yields grinding down effectively non-stop for the last decade has been a real
headwind for value investors. If the mood music changed and bond yields
were to rise I think that would be hard for some stocks that perform very
well against that backdrop – the growth stocks – other stocks such as
financials, particularly banks, benefit from an upwardly sloping yield curve i.e.
from long dated government bond yields being higher than short
interest rates. Don’t forget we’ve had falling bond yields for the best part of
perhaps more than three decades, so almost the whole of the investment
community that’s all they’ve known, if bond yields start to rise the rules of
engagement could change very significantly and help a very different
group of companies. And you mentioned financials there as one of the sectors
that would benefit from that. Is that one of the sectors where you’re seeing
particular opportunities and where else? Yeah we’re quite heavily invested in the
financials, in the banks in particular. We’ve got Royal Bank, and Barclays,
and Lloyds, even Citigroup in the US. And as much than anything else we
like it because it’s a sector which lots of people have decided to completely
avoid. As much because what happened in the last financial
crisis, so they they felt coming out of that ‘I’m never gonna buy a bank again’ but
these institutions have significantly changed; new management, new better balance sheets, better regulation. And they’ve learnt the lessons of
the last cycle so we haven’t got any exciting stories to tell about the
banks we just think they’re going to be much more stable and they can get
through a recession much better than last time around. So we think they’re
just gonna surprise people with perhaps how dull and boring they could
be Alastair, thank you very much Thank you