Mundy (pictured) targets undervalued companies that are out of favour with the wider market, but he says that the strong performance across equity sectors since 2009 has left him with little opportunities to choose from. This, combined with historically low yields across the fixed interest market, has prompted him to build up his cash weighting to unprecedented levels.
"The markets have pretty much doubled since 2009 – we took the chance to buy cheap stocks then, but now the valuation of everything is at significantly higher levels," he explained.
"A lot of investors are getting excited at the moment because markets are going up, but I’m not one to buy into momentum. A lot of people are perma-bulls, looking for any reason to be optimistic, but for me the numbers aren’t great."
"That’s why I’ve been building up cash to the mid- to high-20s. I’m looking for value, and if I can’t see it anywhere, then I’ll hold cash. It’s the highest level it’s ever been in the fund."
Performance of indices since March 2009
Source: FE Analytics
Mundy points to the 2.65 per cent yield on the FTSE 250, which is close to an all-time low, as an indication of how far valuations have gone.
As well as Investec Cautious Managed, Mundy heads up the Investec UK Special Situations fund and the Temple Bar Investment Trust. The fund has 9.5 per cent in cash, while the trust has 12 per cent.
"UK Special Sits has to have 80 per cent in UK equities and I’m right at the limit at the moment," said Mundy.
Investec UK Special Situations currently has 81.4 per cent in UK equities. The remaining 18.6 per cent is in cash and overseas equities.
While a number of high-profile fund managers believe 2012 to 2013 marked the early stages of an equity bull market, Mundy is not convinced.
He commented: "The magic of the 1980s was that valuations were so low at the beginning. By 1999, valuations were incredibly high."
"We are absolutely nowhere near the valuations of say 1982, but are we anywhere near 1999? No we’re not, but this was a one-off. Prices have never been that expensive before or since."
"It’s dangerous to assume that bull markets will go to that kind of level again."
Mundy says he looks for value stocks by taking advantage of three trends: market falls, sector rotation and stock-specific situations.
He says it is difficult to find opportunities in all three.
"During market rallies, stocks tend to go up together," he said. "Especially recently, this hasn’t been a market where some sectors have been dreadful and some have been strong."
"Finding opportunities from the market falling is even less likely, as it would have to fall very far. Back in November when the market was 10 per cent lower than it was now, I didn’t buy a lot, and the same goes if you go further back."
"I topped up some cyclicals last summer because they were quite weak, but that’s about it."
"To be honest, I prefer it when markets go down, because I can find cheap companies. Bull markets worry me – stocks get more expensive and you see a lower quality of buyer coming through."
"I’ve got nothing against my fund going up – you’ve just got to be ready to say that stocks have gone up too far, which is where the cash comes in."
The manager says fixed interest is even less appealing. In terms of this asset class, the fund is invested almost exclusively in inflation-linked bonds and Norwegian government debt to protect against the possible backlash of quantitative easing across the US, UK, Europe and Japan.
"I suppose yields could go a bit lower if we see deflation and another flight to safety, but I haven’t got a lot of protection there," he explained.
"I’m still worried we could see a major financial currency crisis, and I see UK index linkers and the kroner as a good way to hedge against this. I’m not looking to make huge gains in this area."
"I don’t think the yields on high yield bonds are all that high to be honest. They’re quasi-equities in my eyes, so I’d rather just hold the real thing," he added.
Two areas that Mundy thinks offer good value are gold equities – another possible inflation hedge – and Japanese equities.
Both are currently out of favour with most fund managers. Gold equities have had a torrid two years, with the HSBC Global Gold index down 31.29 per cent over the period, while Japan has consistently been the worst-performing developed equity market over 20 years.
"Gold companies have not been very well run in general and there have also been some more general problems surrounding cost," he explained.
"A lot of people have chosen to just buy gold as a hedge rather than gold equities, which I can understand. However, everything has its price."
"It’s the first time I’ve included Japan. Yes, it’s a story everyone has heard before, but valuations at the moment are significantly cheaper than the 20-year average."
"The government is talking the right language with regard to inflation targets and so on. You can say the US is also talking the right language, but you have to pay significantly more for this market."
Japan has an 11.4 per cent weighting in the Cautious Managed fund.
Mundy’s Temple Bar IT has a strict income mandate and has successfully grown its dividend for 29 consecutive years.
The manager says there is a growing challenge for equity income investors at the moment, as yields have contracted to such an extent.
He admits he has had to make the trust more concentrated, increasing the dividend risk as a result.
"The popular income stocks that were yielding 30 per cent more than the market are now only yielding 5 per cent more," he explained. "We’ve seen a lot of yield contraction around the mean."
"The portfolios are more concentrated than they have ever been, reflecting the lack of ideas."
Temple Bar IT currently has more than 50 per cent of its assets in the top-10 companies. These include GlaxoSmithKline, Shell and Vodafone.
When asked why he does not move down the market cap scale for income opportunities, Mundy replied: "Small and mid cap income funds have had a very good run."
"You’ve seen a lot of fund launches in this area recently for that very reason."
"A wave of fund launches tends to come after the story has had its day."
Investec Cautious Managed has returned 114.85 per cent since Mundy started running it in August 2002, beating its sector average by 39.64 percentage points.
Performance of fund vs sector since Aug 2002
Source: FE Analytics
It also beat its composite benchmark – split 50/50 between the FTSE All Share and Merrill Lynch GBP Broad Market index – over the period.
Investec Cautious Managed is a top-quartile performer in the IMA Mixed Investment 20%-60% Shares sector over three, five and 10 years.
The £2.4bn portfolio is available for a minimum investment of £1,000 and has an ongoing charges fee of 1.6 per cent.
Investec UK Special Sits and the Temple Bar IT have also consistently outperformed their sector and benchmark.