alastair mundy - cii local institutes · inflation or debt forgiveness remains a threat as central...

Being wrong

A Contrarian’s view on markets

Alastair Mundy

2 Confidential | Investec Asset ManagementConfidential | Investec Asset Management

Target audience

This document is being provided for information purposes for discussions with Chartered Wealth

Management and their selected clients. Circulation must be restricted accordingly.

Nothing herein should be construed as an offer to enter into any contract, investment advice, a

recommendation of any kind, a solicitation of clients, or an offer to invest in any particular fund,

product, investment vehicle or derivative.


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


But why don’t we admit to our mistakes?

1. Hubris

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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


● While government debt has increased, bond yields have counter-intuitively fallen. They must inflate the

debt away or eliminate it another way. The debt must be inflated away or eliminated in another way

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


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


Fund positioning

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

Corporate profits and wages & salaries as a % of GDP


● 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


Fund positioning

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


Japanese equities still attractive

Japanese equities remain out of favour and appear attractively valued

Source: Morgan Stanley


● 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


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 March 2016


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


Investec Cautious Managed Fund

Asset allocation and holdings

The portfolio may change significantly over a short period of time. This is not a buy or sell recommendation for any particular stock

Source: Investec Asset Management, 31 July 2016

Update: Monthly

Top 10 equity holdings % of fund

Investec UK Total Return Fund 6.3

HSBC Holdings plc 2.1

Citigroup Inc. 1.9

Grafton Group Plc 1.8

Royal Bank of Scotland Group plc 1.6

Travis Perkins plc 1.5

Lloyds Banking Group plc 1.4

Microsoft Corporation 1.3

Metcash Limited 1.3

CRH Plc 1.3

UK Equities29.1%

North American Equities 14.5%

Japanese Equities 8.9%

Far East ex Japan Equities

2.2%European Equities 0.5%

Short S&P 500 futures -24.0%

Gold & Silver Shares 5.3%

Physical Gold & Silver11.3%

UK Index-Linked

Government

bonds 9.4%

US Index-Linked

Government

bonds 2.2%

Cash and short dated

Government

Bonds9.4%

Norwegian Government

Bonds

7.3%


GBP Investec Cautious Managed Fund A Acc / I Acc (no quartile) F0GBR04RO6 / F000001ZKD

Past performance should not be taken as a guide to the future, losses may be made.

Source: Morningstar, dates to 31 August 2016, NAV based, inclusive of all annual management fees but excluding any initial charges, gross income reinvested, in Pound Sterling.

* Tenure 30 July 2002. I Acc Share launch date: 03 March 2008.

**Performance show n prior to I Acc share class launch date is that of the A Inc share class launched 07 June 1993, unadjusted for differences in fees. Fund ratings may be provided by independent rating

agencies based on a range of investment criteria. For a full description of the ratings please see w w w .investecassetmanagement.com/ratings.Quartile ranking w ithin IA Mixed Investment 20-60% Shares sector.

Investec Cautious Managed Fund

Attractive long-term performance

GBP Investec Cautious Managed Fund A Acc / I Acc (quartile) F0GBR04RO6 / F000001ZKD Other

438.7

56.6

256.1

-50%

0%

50%

100%

150%

200%

250%

300%

350%

400%

450%

500%

Jun-93 Jun-95 Jun-97 Jun-99 Jun-01 Jun-03 Jun-05 Jun-07 Jun-09 Jun-11 Jun-13 Jun-15

Investec Cautious Managed I Acc

UK CPI

IA OE Mixed Investment 20-60% Shares

3 months YTD 1 year

3 years

p.a.

5 years

p.a.

10 years

p.a.

Tenure

p.a.*

Since

launch

p.a.**

Investec Cautious Managed I Acc 7.9% 12.9% 10.9% 3.5% 5.8% 5.3% 6.9% 7.5%

UK CPI 0.4% 0.5% 0.6% 0.7% 0.7% 0.7% 0.7% 0.7%

IA Mixed Investment 20-60% Shares 7.2% 8.8% 10.5% 6.2% 6.9% 4.4% 5.7% 5.7%

Quartile ranking 2 1 2 4 4 2 2 1


In summary

● We don’t always admit to our mistakes

● It’s easier to stick with the herd or make excuses

● ‘Groupthink’ is alive and well with central bankers and investors

● This can provide opportunities for contrarian investors

Thank you

www.investecassetmanagement.com


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Issued by Investec Asset Management, March 2016

Telephone: +44 (0)20 7597 1900

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