Mundy's Moments: Value and me always
Choosing a good fund still requires personal touch
Recently, I sat on a panel that was asked whether we thought our jobs would ultimately be replaced by computers.
A fellow panellist explained how he believed the most likely outcome was a combination of the best parts of humans and machines.
Fortunately, the MC then moved onto the next question and my input was not required.
I was planning an apparently glib, but genuine, response that centred on the fact that a computer cannot hold a client's hand when everything appears to be going wrong and the client is at risk of a rash dose of capitulation.
As I considered the question a bit more, the answer became rather more complex. I assume the questioner was saying why not just buy an ETF rather than a fund. The arguments for and against indexation are well known and I do not intend to revisit them here.
But someone looking to purchase a value ETF must have a very firm view on which type of value they are keen on. The choice is far from straightforward.
For example, ETF.com lists 63 value ETFs traded in the US market alone, and while the list covers a multitude of sins, the largest component of that list is US Large Cap Value.
Even then, very distinct choices must be made, as over the course of just three months to 8 July, the difference in total return between the best and worst ETFs in that sub-sector was just shy of 10%.
The reason for this significant dispersion in just the very short term is that value means many things to many people. Some prefer price-to-book, some price-to-cashflow, some price-to-earnings and so on.
One could obviously pick the value metric that back-tests the best, but back-tests assume perfect liquidity and the buyer also assumes the future will look very like the past.
Tesco has not yet been a great recovery story, but is at least nicely off its lows. It is also no longer the stock that attracts most client scrutiny (M&S has taken on that mantle).
Or, to be more precise, we no longer have to defend it as a structurally challenged, highly indebted, badly managed business.
Instead, we are told, it is many competitors' favourite stock and not contrarian at all.
As I have said before, our dirty secret is that we only make money if other investors agree with our views and the weight of their money pushes a share price higher.
We are not embarrassed running with the pack if the shares remain good value.
Contrarians are naturally drawn to companies with significant challenges and consequently can often find themselves focusing on the most distressed player in an industry.
However, we do not always have to buy the equivalent of the cheapest house on the cheapest street to benefit from a change of fortune for an industry.
Alastair Mundy is manager of the Temple Bar investment trust and the Investec UK Special Situations fund
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