History always repeats

A visit to Cavendish Asset Management’s Ealing offices comes as something of a shock to those more accustomed to visiting the often stuffy, strait-laced City addresses of most fund houses. Part of the Lewis
Trust Group, Cavendish is housed in the ultra chic abode of fashion retailer River Island, and it is a truly peculiar experience trying to keep my mind on investment as I trek to a meeting room past a crowd of young models trying out the latest outfits.

Not such a strange experience for Paul Mumford, Cavendish’s senior investment director, whose selfassurance comes from over 45 years of career experience spanning the ebb and flow of many fads and
fashions, both in tailoring and investing. He began his career in London in 1963 at stockbroker Norris Oakley Brothers but it was not until a move to stockbroker R Nivison in 1974 when he first stated to specialise in smaller companies in the unlisted securities market, which was to become AIM in 1995.

Following the City’s ‘Big Bang’ in 1986, and the consequential dramatic cut in commission rates, Mumford
moved into fund management in 1988 with Glenfriars Unit Trust Managers. This provided a platform for the
launch of his Opportunities Fund, which he took with him to Cavendish upon its formation in 1994.

The fund has the flexibility to invest across the cap scale, although with a bias towards smaller caps, and has since risen to around £37m under management. Mumford has also expanded his role in managing two other UK vehicles, the £12m AIM and £26m Select funds.

Past and present

Given his experience, it is natural for Mumford to punctuate his views on current market conditions with
reference to past cycles. Indeed, a good memory is an essential trait for any value-focused stock picker, particularly when assessing the potential of stocks and sectors in the wake of a global recession. “Over the years, because of the contrarian approach, themes have changed in the portfolio; the whole emphasis is forever changing,” he remarks.

“Back in 1988, the reason for buying smaller companies was because post the market crash, at the end of 1987, smaller companies got hit hard and were cheap because nobody liked them. Similarly, looking at the latest crash we have had, again it has been a great hunting ground for smaller companies, which also mirrors the 1973 crash.”

Darkest before dawn

Despite having worked through several market crashes, Mumford admits that the subsequent market rallies have always caught him by surprise, precisely because they occur at the bleakest period when investors felt markets could only deteriorate further. He says: “Having gone through the crashes of 1973 and 1987, and the dotcom bubble bursting, I have learnt that firstly you have to hold your nerve; secondly you buy attractively priced stocks because they will always get taken over if they stay cheap long enough; thirdly, you also have to stick with your portfolio and not try to be too clever on timing. The first 25% to 50% of the rise appears in a very short space of time and it always happens when least expected.”

Nevertheless, Mumford picks out several themes that dictate the current positioning of the Opportunities Fund, which generally holds between 60 and 70 stocks.


The first is historic areas of undervaluation – sectors of the market which were racing before the 2008 recession but that are now avoided by the majority of investors. A good example is the retail sector, with consumer goods making up around 6% of the fund.

Says Mumford: “The forecast is for things to be horrible because of the cuts in spending, the forthcoming rise in VAT [to 20% from 4 Jan, 2011] and the cost of importing goods.

But this to a large extent is discounted in share prices and at some stage the retail market will improve. We
could even get a mini boom leading up to Christmas as people buy big-ticket items to save on VAT. If you are buying Next or M&S on single figure PEs, then that is good value.”

Going for cheap

Another example in this category is housebuilders, where companies have been able to raise money at an opportune time and were able to buy land at much cheaper prices than they have in the past. Consequently their margins are looking better and they are well placed for when the market picks up. Mumford’s holdings here include Bovis and Persimmon Homes.

A third sector he likes is support services, where he believes many of the companies will be resilient to
government cuts which is not reflected in prices. He holds Costain, Corillian and Babcock. He recaps: “I originally bought into this area of the market in 2000, when they were defensive sectors with 8% average earnings growth. I was buying these on average 8x or 12x PEs but they got re-rated to 20x or 30x and we made a lot of money as they moved from defensive to a growth sector. That trend is likely to continue.”

Wiser heads prevail

This relates to a second theme, finding re-rated areas of the market. Here, Mumford tends to concur with a widely-held view among the fund management community that, in general terms, UK plc has acted wisely during the recession in fast-forwarding restructuring plans, making redundancies and cutting out unprofitable areas of business. Stocks bought on the strength of this theme tend to be large holdings in the Opportunities
Fund and include Dialight, TT Group and XP Power, which are all among its top ten holdings.

It’s a gas

Thirdly, Mumford is looking for genuine growth that is not recognised by share prices and, as such, is heavy in oil and gas companies which account for over 12% of the fund’s holdings.  He originally bought in to the likes of Tullow Oil and Dana Petroleum in the late ’90s, although as these companies have become bigger and more mature, a raft of new companies have emerged and made discoveries which, according to Mumford, are not reflected in their share prices. At present his two largest holdings, which fit this bracket, are Nautical Petroleum – which has made two recent North Sea finds – and Faroe Petroleum.

Changing times

Aside from Mumford’s obvious skill and experience, a key selling point of the Opportunities Fund is his flexibility to change the slant of the portfolio during different market cycles. He has always made it clear that the fund is not necessarily tied to the lower end of the cap scale, and can also buy larger recovery situations in out-offavour sectors.

“I can buy M&S, British Aerospace or Taylor Wimpey because people do not like those large companies,” he explains. “Between 1992 and 1995 I was mainly in larger companies, although since then I
have mainly stayed in smaller companies. At the end of 2008, when the market was absurdly cheap, I bought back into some larger companies – banks, insurers, property and retailers were at stupidly low valuations so I bought into the likes of Lloyds, Barclays, RBS and mining shares in Xstrata.”

He concludes: “My take moving forward is that there is some good share price growth to come out of the market not least because of the changes that have been made by companies themselves; not least because many of the FTSE stocks have got overseas interests; and not least because of the recovery situations
in the stock market, among both large and small companies.”