Fund briefing: risks and rewards of contrarian investing - should you consider it?

6 February 2019
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We look at the risks and rewards of taking a contrarian view of the stock market, buying when share prices are falling and selling when they are rising

One of the best ways to make money is buying unloved stocks and then watching their share prices soar as they prove the experts wrong. It’s an approach that requires a certain amount of bravery, but the rewards can be good.

Companies can find themselves shunned by investors for a variety of reasons. They may be in sectors whose futures are under threat, focused on export markets that are mired in political uncertainty, or simply being punished for failing to hit targets.

These factors can affect the share price. When sentiment swings against them, even highly profitable companies in flourishing areas can see their valuations plummet. The stock market is an unforgiving environment but doesn’t always get it right.

It is virtually impossible for individual investors to identify companies that have been undervalued. It requires a level of research and access to senior management most won’t have.

This is where so-called contrarian fund managers have a role to play. They will take the consensus view on stocks, sectors and countries, and use their resources to search for evidence that it is wrong or that an important piece of the story has been overlooked.

Contrarian managers will usually then buy when share prices are falling – or have already fallen significantly – according to Justine Fearns, research manager at Chase de Vere.

Being contrarian sounds simple but it can be hard to achieve

“The contrarian investor then waits for a catalyst for change and a turnaround in the fortunes of that asset, which means mainstream investors begin to buy and the asset price rises,” she explains. “When the price has risen, the contrarian investor will then look to sell.”

The whole premise, therefore, is buying at a low price when others are selling, and then selling at a higher price when others are buying. It might sound simple in theory, but the reality is that it can be far harder to achieve.

“A contrarian approach requires clarity of process, a long-term view and, at some points, a very sturdy character,” adds Ms Fearns. “It’s not easy to turn your back on prevailing investor sentiment and strike out on your own path.”

Quick guide: Are contrarian funds right for me?

Consider investing if…

  • You don’t always want to go with the consensus
  • You are patient
  • You want a manager that doesn’t follow the herd

One of the most famous contrarian investors in recent history is Neil Woodford who studiously ignored technology companies during the dot-com boom almost 20 years ago while he was at Invesco Perpetual.

Despite being widely derided for his stance at a time when the value of any internet-linked company was going through the roof, he stayed true to his convictions. When the bubble eventually burst, he was vindicated and his reputation was made.

Contrarian investing is not without risk. There are plenty of reasons why the expected turnaround in fortunes of a company may never happen or takes years to occur, consigning the company to spending years out of favour.

In fact, rather than improving, a company’s situation may deteriorate dramatically and wipe out your entire investment.

Ms Fearns favours contrarian funds with a clear and well-articulated process, managed by an experienced manager and/or team that has a proven record of success.

“The focus should not be solely about buying cheap assets,” she says. “There should be a variety of stocks in the portfolio at different stages of recovery and relating to different types of opportunity, such as management and structural change.”

This style of investing can feel very uncomfortable as you are basically doing the opposite to everyone else and often have to wait for an investment to come good, points out Darius McDermott, managing director of Chelsea Financial Services.

“A contrarian investor can be very early – or wrong – for a long time and this can really impact performance,” he says. “You have to be patient as it can be very rewarding over the long term because if the manager is right, they can make a lot of money.”

There is not a specific sector catering for contrarian funds.

Suitable funds for a contrarian approach are found in a variety of sectors

It is all down to the approach of individual managers, which means suitable funds for those wanting such an approach can be found in a wide variety of investment sectors.

Mr McDermott cites Alastair Mundy, manager of the Investec Cautious Managed fund, as someone who has a tried-and-tested contrarian approach to managing equities, and also rates William Lam at Invesco Asian.

Irrespective of the manager’s credentials, however, contrarian investing won’t be a smooth ride.

“Investors should expect volatility when investing in this type of fund,” he adds.

“They should look for a manager who sticks to their process, even when it is really uncomfortable to do so, and even when the style has been out of favour for a long time.”

Ben Whitmore

One to watch: Jupiter UK Special Situations

The aim of the fund, which has been managed by Ben Whitmore for 12 years, is obtaining capital growth by exploiting special situations, principally within the UK. Its focus will be on buying into equities that the manager believes to be undervalued.

This fund, which currently holds 33 stocks, is managed with a distinct contrarian and value-based approach, according to Darius McDermott, managing director of Chelsea Financial Services.

“It offers investors access to a reasonably diversified portfolio of large and mid-cap UK stocks,” he says. “Ben’s approach has led to long-term outperformance, and there is a lot to recommend about this fund,” he says.

Shares in the portfolio are held for the long term, with Mr Whitmore being sceptical of share forecasts as he believes them to be inherently unpredictable. As a result, analysis is carried out using historic data.

Its 10 largest holdings account for just over 40% of assets under management, according to the most recent fund factsheet. Large-cap names account for 70.9% of the fund, with 14% in mid-caps and 1.4% in small. Currently, 13.8% is held in cash.

Oil giant BP is the biggest name with a 6.8% position, followed by Aviva with 4.8%, GlaxoSmithKline on 4.5% and Imperial Tobacco with 4.4%. Other prominent names in the list include Barclays and Royal Bank of Scotland.

Value of £100 invested in the fund over five years*

Year20142015201620172018**
Fund percentage movement in year (%)3.710.1822.449.21-5.54
Value of £100 ***(£)134.05134.29164.42179.56171.11

** To 12 December 2018 *** The £100 was invested on 1 January 2013 Source: Moneywise.co.uk

ManagerBen Whitmore
Launch date3 June 199
Fund AUM:£1.9 billion
Minimum initial investment£500
Min top-up investment£250
Initial charge0%
Ongoing charge1.74%
Annual management fee1.5% a year
Contact details for retail investors0800 561 4000

* Fees and investment amounts may be lower when investing through a platform.

ROB GRIFFIN writes for the Independent, Sunday Telegraph and Daily Express.

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