Investment Opportunities - Contrarian

When markets go through volatile times, which we certainly saw at the beginning of this year, it can be challenging for investors to know what to do with their existing fund holdings, equities and/or ETFs, let alone which ones to buy. But actually these are precisely the times when "contrarian opportunities" can present themselves.


What do we mean by contrarian?


By contrarian we mean going against the crowd, doing something that the consensus may not be doing and looking at opportunities they may have forgotten about.

It is often possible to make a case for funds, equities or ETFs which have underperformed being the most likely to deliver outperformance going forward. We find contrarian investments tend to fall into three categories:

  1. Unloved and forgotten >
  2. Value versus growth >
  3. Fallen angels >

Unloved and forgotten


Due to macro events and market fluctuations, some companies or even sectors can get ignored and forgotten about.

Some funds on the TD platform which have underperformed over the last three years, for example those focused on resources and energy, can put this down to macro events such as falling commodity and oil prices. Within this sector we believe funds such as Guinness Global Energy and First State Global Resources could represent just such contrarian opportunities given the skill of the respective fund managers.

Emerging markets have also become interesting after record outflows of $735 billion (£513 billion) from emerging market funds in 2015 according to the Institute of International Finance (IIF). Many emerging market funds were closed to new investors at the peak in 2014, with investors scrambling to get in. Now emerging markets are looking cheap relative to developed markets. Funds focusing on this area include JPM Emerging Markets Income, Fidelity Emerging Markets and M&G Global Emerging Markets.

Fund
Guinness Global Energy View reportInvest now
First State Global Resources View reportInvest now
JPM Emerging Markets Income View reportInvest now
Fidelity Emerging Markets View report Invest now
M&G Global Emerging Markets View report Invest now

Value versus growth

The subject of value versus growth investing is a relevant one. When looking at funds you will often see the investment style of a manager described as either value or growth. The difference is in the approach they take and the type of stocks they select for their portfolio. Different market conditions tend to suit different styles and can have a significant effect on a fund's performance.

Furthermore, many fund managers who focused on value stocks have struggled to deliver satisfying returns over the past few years. However, those areas which are least loved often present the best opportunities. Veritas Global Equity Income could be a good option for investors seeking an out-of-favour value fund. Its managers are theme-based value investors with a highly focused portfolio of well-researched shares. As it shuns the consumer discretionary sector and the US, it has missed some of the growth returns of late, but we feel it is positioned to perform well in the medium to long term. The fund has holdings in stocks such as Sonic Healthcare, the largest medical laboratory provider in Europe with more than 30,000 employees.


Styles go in and out of favour

When markets in general are rising, which is what we have seen over the last few years, growth funds tend to do better. If stock prices fall, growth funds often underperform and value funds come to the fore.


Value funds tend to outperform in the long term

While value funds have generally underperformed growth funds over the last five years, in the long term, value investment strategies have been shown to reverse that trend. The charts below show how Dixons, a growth stock, has outperformed Tesco, a value stock, over the last five years. Since the start of this year, however, the tables have turned, with Dixons' future growth prospects looking less rosy but Tesco is on the up after sorting out its senior management problems and finances.

Value

Value investors aim to identify companies whose price doesn't reflect their worth, sometimes referred to as cheap. Value funds typically have higher dividend yields than growth funds as they often invest in mature companies which use their earnings to pay dividends.

Superior growth

Growth investing, on the other hand, focuses on companies which experience faster than average growth. Technology is a good example where many stocks are on growth rates in excess of 100%. Growth companies are often more likely to reinvest profits rather than pay them out as dividends.

Relevant stocks and funds
Veritas Global Equity Income View reportInvest now
Tesco Plc View report Invest now
Dixons Plc View report Invest now
Sonic Healthcare View report Invest now

Long term performance of Tesco vs Dixons


Past performance is not a reliable indicator of future results
Source: Morningstar Direct as at 31st March 2016.

What a difference within a few months - reversal of fortunes for Dixons and Tesco


Past performance is not a reliable indicator of future results
Source: Morningstar Direct as at 31st March 2016.


Time for value funds to outperform?

Given the strong run by growth versus value over the last few years, and the shaky start markets have endured in the first quarter of this year, it could be time for value funds to outperform once again.

Fallen Angels

A fallen angel is a company or perhaps a sector which was doing really well and adored by all but has now fallen on hard times for various reasons. However, it still has the potential to be successful again in the long term.

Alastair Mundy, manager of Investec UK Special Situations, concedes the fund has had a poor few years in terms of performance but believes value stocks look as cheap as they have done for 40 years. The nature of the fund means he has had to endure periods of underperformance but his value style has worked well over the longer term. With Mundy’s particular contrarian value bias, which looks attractive at this stage in the economic and market cycle, his portfolio could now start to reach its potential. He favours a number of mega-cap stocks such as HSBC, GlaxoSmithKline and BP, with further exposure to banks and supermarkets within his top 10 holdings.

Man GLG Undervalued Assets

Is run by Henry Dixon using a highly disciplined investment process. Morningstar has recently upgraded its Analyst Rating from Bronze to Silver, recognising its confidence in Dixon and his team since it moved to Man GLG in October 2013. The fund recently bought a holding in software company Playtech, with Dixon saying during market falls he is drawn to companies holding net cash. Online betting platform Plus500 was also added, which after a traumatic year in 2015 is now delivering impressive results.

Old Mutual UK Alpha

Managed by Richard Buxton, is beginning to benefit from its overweight position in large-cap stocks such as GlaxoSmithKline, Aviva and Sage Group.

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