a contrarian’s view on markets alastair mundy · a contrarian’s view on markets alastair mundy....

Being wrong A Contrarian’s view on markets Alastair Mundy

2 Confidential | Investec Asset Management P20160906780_3050P

Confidential | Investec Asset Management

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It’s not always good to own up to your mistakes



But why don’t we admit to our mistakes?

1. Hubris

http://moblog.whmsoft.net/en/Hot_Trends.php?language=english&keyword=Attila+The+Hun+Pictures&depth=1&fullimage=http://moblog.whmsoft.net/shared_images/en/attila_the_hun_2e4a519a359f96e481ef033ab892511c.jpg



The desire for confident decision makers

The industry likes people with views.. ..and isn’t interested in ditherers



Hamlet’s problem

● Hamlet’s dad (Head Honcho – aka the king) ....killed by his brother ....who then married his mum ....and became the new king

● Hamlet was, therefore, considering killing his:

‒ Uncle ‒ Step-father ‒ And the King!



Why don’t we admit to our mistakes?

2. Forgetfulness

● Ebbinghaus’s curve of forgetting

● It is easy to rewrite history as our memory decays exponentially over time ...however important the occasion

● But our confidence in our memory does not decay anywhere near as quickly ...it even increases!

● That is why radio shows succeed with ‘Guess the Year’ features



Even when we do confess, it’s not our fault...

● I was wrong but...





it wasn’t my fault

my choice was by far the most sensible

there was a left-field event that ruined everything

I was very close to being right

I will be right next year



Why do we make mistakes? Mob rule?

● Famous experiment by Solomon Asch to illustrate conformity

● 100% of participants answered correctly when no stooges were present

● 75% of participants answered incorrectly at least once when stooges answered before them

● Later research showed that the participants REALLY thought the facts had changed



Groupthink

Easy to detect in hindsight: Independent Evaluation Office of the IMF: IMF performance in the Run-Up to the Financial and Economic Crisis, December 2010:

many outside the Fund, and some inside the Fund, had raised major concerns about financial stability; but these concerns were not sufficiently listened to. This was partly because of the confidence of the authorities in many advanced economies, and in particular in the United States, that financial institutions in their countries knew how to manage risks...part of the problem was the similar mindset of many mainstream economists working at the Fund, with similar background and training and who were not open to dissenting views.

Both in and outside the Fund, there were other economists and policy makers with contrarian views. But their views were not encouraged or closely examined within the Fund.



But mistakes are not so easy to spot beforehand

Some ‘fan-mail’ circa 2000 for Albert Edwards (Societe Generale’s ‘permabear’)

What kind of stupid, pompous fellow! What a poor attempt to gain attention.

Send this old, sclerotic and dangerous man into pension or, this would be much better, take him

to prison. He’s obviously ill and not qualified to be chief strategist of Dresdner Kleinwort. I hope

his prophecy will destroy his career for the next thousand years



A few improvements

● Possible ways to avoid groupthink:

‒ At least one group member should be assigned the role of Devil’s Advocate

‒ All effective alternatives should be examined

‒ Outside experts should be invited into meetings

‒ Senior team members should not express an opinion when assigning a task to a group

● Think in terms of scenarios and probabilities and not definites

● We must force ourselves to consider both sides of every argument ...and only then make our decision

● Checklists – to avoid repeating silly mistakes

How may others be trying to avoid being wrong?



● Don’t be wrong on your watch ● Don’t be wrong by being unconventional

● Don’t be wrong fighting the Fed

● Don’t be wrong being too early

● Don’t be wrong on your own

● Don’t be wrong fighting a trend

● Don’t be wrong again



Central bank credibility is under threat Central Banks will soon move onto more unconventional policies

Source: Source: BofA Merrill Lynch Global Research. Sample set is 70 countries in 2006, rising to over 100 countries currently & 16th Geneva Report on the World Economy, OECD and IAM calculations, Bloomberg February 2016. For illustrative purposes only, not intended as a recommendation of investment strategy. The value of your investments can fall and you may get back less than you invested.

● Very low/negative interest rates are yet to catalyse economic growth and inflation ● And debt moves ever higher ● We are moving closer to the introduction of even more unconventional policies

Fund positioning Norwegian Krone, gold and silver, and gold & silver shares

World total debt ex-financials (% of GDP) Percentage of countries in inflation / deflation bands



● Don’t be wrong on your watch

● Don’t be wrong by being unconventional ● Don’t be wrong fighting the Fed







● While government debt has increased, bond yields have counter-intuitively fallen. They must inflate the debt away or eliminate it another way. This will be bad for conventional government debt

Inflation or debt forgiveness remains a threat As Central Banks introduce new policies, fears about government indebtedness may surface

1 2Q14 data for advanced economies and China; 4Q13 data for other developing economies. NOTE: Numbers may not sum due to rounding. Source: McKinsey & Company, February 2015 & Incrementum AG, June 2015. For illustrative purposes only, not intended as a recommendation of investment strategy.

Fund positioning Zero exposure to conventional government bonds

Global stock of debt outstanding by type $ trillion, constant 2013 exchange rates

The dynamics of inflation: within a mere two years dramatic increases in price inflation are possible




● Don’t be wrong by being unconventional

● Don’t be wrong fighting the Fed ● Don’t be wrong being too early






US equities are expensive and balance sheets are vulnerable But high stock dispersion can provide opportunities

Source: Morgan Stanley, Monthly Strategy Guide 3 March 2016 . For illustrative purposes only, not intended as a recommendation of investment strategy. The value of your investments can fall and you may get back less than you invested.

● Valuations remain significantly above long-term averages and earnings are being downgraded

Fund positioning Identifying selective new opportunities, long US financials but short the S&P 500

Top 500: Price-to-Forward earnings Annual S&P 500 consensus EPS



Profit margins now eroding – although not yet reflected in corporate announcements

FactSet, J.P. Morgan Asset Management, 30 June 2016 For illustrative purposes only, not intended as a recommendation of investment strategy. The value of your investments can fall and you may get back less than you invested.

Fund positioning Identifying selective new opportunities, long US financials but short the S&P 500

Corporate profits and wages & salaries as a % of GDP






● Don’t be wrong being too early ● Don’t be wrong on your own





● Low investor confidence in Japan and Europe creates some opportunities

Equity opportunities do exist Non-US equities look fair value

Source: Barclays, Our Favourite Charts 25 February 2016 For illustrative purposes only, not intended as a recommendation of investment strategy. The value of your investments can fall and you may get back less than you invested.

Fund positioning Our gross equity exposure is quite high but partially hidden by the US short







● Don’t be wrong on your own ● Don’t be wrong fighting a trend




Japanese equities still attractive Japanese equities remain out of favour and appear attractively valued

Source: Morgan Stanley For illustrative purposes only, not intended as a recommendation of investment strategy. The value of your investments can fall and you may get back less than you invested.

● Low valuations, improving allocation of capital and superior earnings momentum supports overweight position

Fund positioning Taking profits on some existing holdings but maintaining exposure to Japanese equities

Japanese equities are cheap – Topix 12 month consensus Improving ROE suggests a higher P/BV








● Don’t be wrong fighting a trend ● Don’t be wrong again



Value appears attractive Value looks attractive relative to growth

Source: Morgan Stanley, Data Gallery 01 July 2016. Past performance should not be taken as a guide to the future, losses may be made. Data is not audited. For illustrative purposes only, not intended as a recommendation of investment strategy. The value of your investments can fall and you may get back less than you invested.

● Low bond yields and low economic growth have driven investors towards areas of the market which they believe have most sustainable earnings

Fund positioning Distinct bias to cheap stocks which have underperformed (financials and industrials)

European Value vs. Growth price performance European Value vs. Growth Price Book Value



Value appears attractive Value looks attractive relative to growth

Source: The Ken French data library, http://mba.tuck.Dartmouth/edu March 2016. Past performance should not be taken as a guide to the future, losses may be made. Data is not audited. For illustrative purposes only, not intended as a recommendation of investment strategy. The value of your investments can fall and you may get back less than you invested.

● Value investing has been a robust, although volatile, investment style over many decades

Fund positioning Distinct bias to cheap stocks which have underperformed (financial and industrials)

Value long term performance in the US (long short cumulative return)

http://mba.tuck.dartmouth/edu%20March%202016



Positive on Banks Banks appear to be offering a favourable risk/return trade-off

Source: Thomson Reuters, Credit Suisse research, as at July 2016. For illustrative purposes only, not intended as a recommendation for any particular stock, The value of your investments can fall and you may get back less than you invested.

● Bank investors are licking their wounds after many years of bad news and increasing regulation. Low interest rates for longer are the latest concern, but valuations are at multi-year lows

Fund positioning Largest equity sector position - HSBC, Lloyds, RBS, Barclays, Standard Chartered, Citigroup, Bank of America, and Japanese bank Resona

Financials are as cheap relative to consumer staples as they were at the trough of the Global Financial Crisis



Temple Bar Investment Trust Portfolio breakdown

The portfolio may change significantly over a short period of time This is not a buy or sell recommendation for any particular security Source: Investec Asset Management, preliminary data as at 31 August 2016

● Portfolio concentration: ‒ Top 10 = 43.3% ‒ Top 20 = 65.6% ‒ Top 30 = 81.7%

% weight UK Equities*Of which: 79.9

FTSE 100 53.8 FTSE 250 21.7 FTSE Small Cap 4.4Internationally listed stocks 6.9Physical Gold & Silver 3.4Cash & equivalents 8.6Fixed Interest 1.3



-8 -6 -4 -2 0 2 4 6 8 10

Financial ServicesFood & Beverage

Personal & Household GoodsMedia

InsuranceHealth Care

TelecommunicationsBasic Resources

TechnologyOil & Gas

Travel & LeisureAutomobiles & Parts

Real EstateUtilities

ChemicalsConstruction & Materials

Industrial Goods & ServicesPhysical Gold

RetailBanks

% weight

Sum of supersector divergences:

29.9%

Sector positions

The portfolio may change significantly over a short period of time. Source: Investec Asset Management, FactSet, as at 31 August 2016

Absolute positions Relative positions

0 5 10 15 20

Financial ServicesFood & Beverage

Personal & Household GoodsMedia

InsuranceHealth Care

TelecommunicationsBasic Resources

TechnologyOil & Gas

Travel & LeisureAutomobiles & Parts

Real EstateUtilities

ChemicalsConstruction & Materials

Industrial Goods & ServicesPhysical Gold

RetailBanks

% weight

Temple Bar % of portfolio

FTSE All-Share weights

Thank you

www.investecassetmanagement.com



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