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BLOG: How to be a contrarian investor

Paloma Kubiak
Written By:
Paloma Kubiak

It’s finally come home! The England women’s football team have achieved the seemingly impossible by winning the 2022 European Championship at Wembley.

The fabulous Lionesses beat Germany 2-1 to give the country a boost and secure our first major footballing trophy since the men’s team lifted the World Cup back in 1966.

It was an incredible victory and illustrated the thrill of overcoming the odds. It’s a feeling with which managers of successful contrarian investment funds are familiar.

What is a contrarian approach?

A contrarian investor does something different to the consensus. For example, when everyone is ditching technology stocks, they will be the ones snapping up shares.

Contrarian fund managers use their skill and resources to scrutinise stocks, sectors, and countries, to see if others could be wrong or have overlooked parts of the story.

Making such calls is not for the faint of heart. Being a contrarian requires an unshakeable self-belief, confidence in your analysis, and a willingness to back your judgement when everyone is arguing against them.

Making the most of opportunities

Although global stock markets are closely watched by an army of analysts, fund managers and observers, they can’t possibly get it right every time. There are simply too many variables.

These can include the impact of wider economic concerns, political instability, or company-specific issues that come to light. When sentiment swings against them, even highly profitable, household name businesses in flourishing sectors can see their valuations plummet.

Company issues

A company’s share price can fall for many reasons. For example, it can be due to missing performance targets, lower profit expectations, or the departure of a senior executive.

In many cases, a contrarian’s stance will focus on the company’s fundamental qualities and whether it’s likely to survive – and prosper – better than the market expects. Their perfect scenario is to buy companies when their share prices have sunk low, then sell them for a handsome profit when the subsequent re-evaluation kicks in.

Pros and cons

Of course, there’s also a downside to this style of investing. The stock price may not recover or could even fall further. There are no guarantees. If the latter happens it means you’ll be out of pocket. It also means contrarian investors can appear to be wrong for a long time, which may impact their returns in the meantime. It’s why investors embracing such an approach need to be patient.

But while this can make it a very volatile ride, the potential rewards on offer for investors brave enough to take this path are certainly worth considering. As we all know, past performance is no guarantee of future results, but if you’re after a contrarian manager it makes sense to opt for someone that has a track record of delivering.

Choosing your fund

Unfortunately, there’s not a specific sector catering for contrarian funds because it’s all down to the approach of individual managers. This means funds for those wanting to go against the crowd can be found in a wide variety of investment sectors and different parts of the world.

Often, they will be given names that hints at a contrarian approach, such as ‘special situations’ and ‘recovery’, although you’ll only know for sure by looking at their aims and objectives. You 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.

Fund ideas

So, where should you start? The good news is there’s certainly no shortage of funds that are looking to defy the odds by investing in companies that are under pressure.

The Schroder Recovery fund, which is managed by Nick Kirrage and Kevin Murphy, focuses on companies that have suffered severe business or price setbacks. More than 70% of this portfolio is in the UK, although it does have exposure to emerging markets, Europe, the Americas and Asia Pacific ex-Japan.

Another popular option is the Jupiter UK Special Situations fund, which offers investors access to a well-diversified portfolio of predominantly larger UK companies. Its manager, Ben Whitmore, looks to buy companies that are out of favour with the stock market. He identifies them by screening to find cheap stocks and analysing their 10-year average earnings.

Of course, wanting a contrarian manager doesn’t mean you need to stick to the UK. There are more internationally-focused portfolios taking similar approaches. Jeremy Podger, the experienced manager of the Fidelity Global Special Situations fund, uses the company’s vast resources to highlight the best ideas from around the world. He will look to take advantage of corporate change, cheap stocks with the potential to grow earnings, and unique businesses with dominant positions in their industries.

Another fund taking a broad approach is Ninety One UK Special Situations that’s run by the management duo of Alessandro Dicorrado and Steve Woolley. It aims to provide capital growth and income over at least five years, with the managers exploiting the herd mentality of markets by investing in unloved and undervalued companies.

Darius McDermott is managing director of Chelsea Financial Services & FundCalibre