In his opinion it is the time for contrarian investors to be investing in large caps and even very large caps, and that is how he is currently skewing his strategy.
“We think investors have capitulated rather early believing that discount retailers will take increasing market share. We think the incumbent food retailers can fight back. There will be a price war but a lot of that has already been discounted in the share prices. Therefore we have started placing positions in food retailers,” Mundy said.
Additionally, he is moving out of telecom holdings such as Vodafone and BT. Instead, he is reinvesting in large oil stocks including BP, Royal Dutch Shell and the BG Group.
“We think many large companies in the market have been under very tough times. Most of them are under new management now, and we think they all have potential to help themselves, particularly through costcutting and selling off some of their least attractive assets,” Mundy said.
He highlighted the fact that small to mid cap companies have outperformed in the last five years, leading some investors to believe that smaller companies have “mythical powers”. For Mundy, these companies start off cheaply, have good earnings and then end up looking expensive, which is where they are currently in the cycle.
“One of the biggest risks is that we continue the ‘muddle through’ scenario. With interest rates staying at the current level and investors no sensible alternatives other than investing in equity markets, equities are being pushed higher. That’s where we are at the most vulnerable at the moment,” Mundy said.
In a similar move reported by Portfolio Adviser last month, Alex Wright, manager of the Fidelity Special Values trust, rotated his portfolio into larger capitalisation stocks and more defensive mid-caps on valuation grounds.
