Despite the fanfare about the return of value investing, the performance of value funds was mixed last year. The Woodford funds were a disaster, Mark Barnett’s trusts at Invesco lagged the UK market by 7%-9% and Scottish Investment Trust lagged the MSCI World Index by nearly 10%. Temple Bar Investment Trust (LSE: TMPL), however, had an outstanding year, returning 29%, 10% ahead of the All-Share index.
Avoiding slip-ups
This represents a return to form by its manager, Alastair Mundy, after several dull years, but the investment style hasn’t changed and nor has much of the portfolio. So why was 2019 so good? “There were no screw-ups in our portfolio,” says Mundy, “while lots of high profile stocks, such as Pearson, Rolls-Royce, Royal Mail and Centrica did badly. The curse of being a value investor is the temptation to buy rubbish. Value investors should buy stocks that are out of favour and on undemanding valuations, not bad companies.”
Mundy doesn’t buy stocks that merely look cheap, “as others do”, but looks for recovery potential. “The market is... wary of recovery stories because most of them haven’t worked. So investors wait too long before buying.”
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As a result, “we are very different from other value investors and there is little overlap between our portfolio and theirs.” The top performer last year was Capita, the business services group whose stock fell by over 90% amid multiple profit warnings between late 2015 and early 2018, but has nearly doubled in the last six months. It is now the largest holding at 8% of the £1bn portfolio.
Travis Perkins, the builders’ merchant, has also recovered from several years of dismal performance: Mundy sees it as a beneficiary of a pick-up in housing transactions from low levels. Irrespective of demand for new houses, home owners will want to repair and extend. Forterra, once the building products division of Hanson, has also done well.
The inclusion of Next in the portfolio is, at first sight, surprising, but Next’s shares have risen 70% since being pulled down by the troubles of the retailing sector in 2018. But Marks & Spencer has performed poorly: “the challenge when Archie Norman took over as chairman in September 2017 was huge”. Given his record at Woolworths, Asda and ITV, Mundy still thinks him worth backing. He sees signs of progress in the food offering.
Safe dividends at banks
Mundy has been wary of HSBC and only has a modest holding. “It has struggled... returns on equity keep falling.” Instead, the portfolio holds RBS, Barclays and Citigroup, whose share price has doubled in the two years. “We want banks to be dull and boring,” Mundy says. “Banks nowadays are not vulnerable to recession as their balance sheets aren’t risky, so the dividends are safe.”
Around 6% of the portfolio is in precious metals, both in miners and in exchange traded certificates for gold and silver. Silver is preferred as it has a growing, but largely ignored, industrial use, yet the price is well below the level where it becomes economic to open new mines. Mundy believes that central bankers are over-confident in the effectiveness of monetary policy so that there is a risk of inflation emerging, to the benefit of metal prices.
The discount to net asset value (NAV) of Temple Bar’s share price has slid to 2%, but the shares still yield 3.5%. As Mundy’s colleague Peter Lowery says, “it has been difficult to be a value investor for ten years, but value is not dead, it has just been hibernating”. With value investing now reviving, recovery stocks at last producing better returns and plenty of potential for further gains in the portfolio, Temple Bar’s shares continue to look highly attractive.
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