What is contrarian investing?

Published July 5th, 2015 - 06:00 GMT
Al Bawaba
Al Bawaba

Contrarian investing is about doing the opposite of what most investors are doing. Those who have been brave enough to follow this mantra have ended up as some of Britain's most successful investors.

Take Neil Woodford of the CF Woodford Equity Income Fund. He is known as an income manager rather than a contrarian but having the conviction to go against the crowd is one of the reasons why this fund manager has such an enviable track record.

Back in the late 1990s, Woodford refused to jump on the technology bandwagon. He got a lot of flak for it, but when the bubble popped he was one of the few investors left unscathed.

Woodford also avoided banking stocks ahead of the financial crisis and steered clear of BP – a staple holding in most income funds – just before it suffered a massive dividend cut after an oil spill in the Gulf of Mexico hit profits.

More recently, he sold out of HSBC just before the bank's woes set in. Luck or skill? Arguably, a bit of both.

But having the courage, experience and a certain amount of self-confidence to go against the herd can reap rewards in investment.

As Warren Buffett (another respected contrarian investor) so wisely put it: 'be fearful when others are greedy and greedy when others are fearful.'

Here are four investments that the crowd is currently shunning but which could deliver long term

1. Banks: bashed & beleaguered

You'll be hard pressed to find a UK sector more hated than the banks and many may argue with good reason. But not everyone is shunning this unloved sector.

Fund manager Alex Wright sees positive change on the horizon. He manages the Fidelity Special Situations Fund and Fidelity Special Values investment trust, once managed by Anthony Bolton, who is widely viewed as the UK's most successful contrarian investor.

Both funds hold CitiGroup and HSBC in their top ten holdings, and also have exposure to the likes of Lloyds, Barclays and Bank of Ireland.

The manager believes the banking sector is one of the most exciting areas at the moment and cheap, largely because it's still such an unpopular sector.

He points out that profits are going up as the sector recovers from the recession, balance sheets are much stronger and the regulatory risks which have many other investors worried, are known and much more manageable than in the past.

2. Supermarkets: not quite so 'super'

While most fund managers like to call themselves 'contrarian', a closer look at their investment process and stock selection may prove otherwise.

However, if you want the real deal, Investec Asset Management's Alastair Mundy can be safely classed as a contrarian. As he puts it: he rumbles through other investors' dustbins to find his best ideas.

One investment that he's picked out of the trash is Tesco, holding the supermarket in both his Investec Special Situations Fund and Investec Cautious Managed Fund.

Mundy agrees that Tesco faces many challenges but believes it can solve its problems over the long term and compete against both the discount retailers and the players at the top-end of the market.

Of course not everyone agrees. Warren Buffett has admitted that buying Tesco was a huge mistake and subsequently sold down his holding in the British retailer.

Fellow contrarian Alex Wright is also not convinced that the UK's big four supermarkets are a good play.

Yes, the sector is cheap and performing poorly, but balance sheets are still weak. He sees little prospect of the competitive environment improving and refuses to buy companies simply because they are cheap – they might be so for good reason.

3. Only the bold hold gold

Another out-of-favour investment that Alastair Mundy holds is gold. The yellow metal seems to have lost its lustre in recent years, falling dramatically in the absence of any real inflation in the global financial system and expectations that US interest rates will start rising later this year.

Mundy says he is holding gold as an insurance policy.

In his words: 'central banks are conducting policy on a 'make it up-as-you-go-along basis' and the unintended consequences of these actions might be quite nasty further down the line.' He wants to build in some protection against future risks like inflation returning with a vengeance.

The manager's view is that gold can be used as an insurance policy against what central bankers might not do, or do too slowly. He says: 'As long as money is being printed, gold is an essential part of the portfolio.'

4. Oil: how low can it go?

Look under the bonnet of both Mundy and Wright's funds and you will see another unloved sector: oil.

The Investec Special Situations Fund holds both BP and Shell among its biggest holdings while fund manager Wright has substantially increased the slice his funds' hold in Shell and BG Group. He has also bought a number of out-of-favour smaller oil companies.
With the oil price more than halving in the middle of 2014, a number of companies in this space have underperformed offering some attractive opportunities for the prudent stock picker.

If you're brave enough to go against the crowd and adopt a contrarian investment it's worth taking note that a long term approach is key. These aren't investments which you can dip in and out of – reaping the returns will take time. First - overcome the strongest emotion: herd instinct and then make sure you're in it for the long haul.

By Maike Currie

Maike Currie is associate investment director at Fidelity Worldwide Investment and the author of The Search for Income – an investor's guide to income-paying investments. The views expressed are her own.

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