The Contrarian Investor: Out of favour but due a comeback?
Let us talk contrarian investing, Mundy-style. Alastair?s new book You say Tomayto: Contrarian Investing in Bitesize Pieces from Harriman House is an essential collection of succinct and witty observations about the mad world of investing.
As you would expect, it is full of common sense, as well as humorous anecdotes from a successful investor (for Investec), who has spent the last two decades plying the dark arts of contrarianism.
I would also suggest the timing of this book is absolutely peerless as the industry is going through another of those ?funny moments? in collective group-think and is in absolutely desperate need of some proper contrarian thinking.
I have lost track of the number of times I have heard an investment prognosis in recent months that does not involve the liberal use of any or all of the following observations:
1. We are in a sideways-moving market
2. It is all about quality stocks
3. In uncertain times, equity income is all important
4. Range-bound markets favour the absolute returns style of investing
5. Liquidity is everything
To be fair, I do not hear all these in the same sentence, and each statement on its own contains more than a modicum of truth. But collectively, I get the sense the entire world of equity investing has been reduced to backing Royal Dutch Shell, GSK or whatever consumer brands company happens to be flavour of the month.
Bizarrely, when investors do seek out diversification, they tend to go in the opposite direction and plump for fashionable multi-asset class, long/short funds such as Standard Life Investments? GARS, where diversification has been taken to its ultimate extreme.
Paradoxically, in this mania for applying Big Macro thinking to individual companies or buckets of different asset classes, we have lost track of a much simpler and more noble pursuit. Namely, the focused contrarian fund manager with a potentially explosive portfolio of underachievers on the cusp of change.
These days I rarely encounter a fund manager with a very focused portfolio of, say, 20 or 30 stocks (or bonds). The prevailing pattern seems to be a core group of five to 10 major bets, comprising the ?quality? 50% lump of assets, followed by a very long tail of dozens of investments comprising the other half.
My suspicion is many fund managers seem to want the best of both worlds, with a core focus on those large-cap quality assets, followed by a diversified tail of what are in effect index- hugging assets.
Yet the data suggests this approach is not working for the industry. S&P in the US has been keeping a long-term score card of active fund managers? results, comparing them consistently against all manner of passive benchmarks.
Its conclusion remains unequivocal and negative ? ?over the last five years, the majority of active equity and bond managers in most categories lagged comparable benchmarks. Within the US equity space, with the exception of large-cap value, the active equity managers in all the categories failed to outperform the corresponding benchmarks.?
Yet S&P?s most damaging conclusion is that ?for proponents of style box-driven investing and the asset allocation framework, style consistency matters tremendously. Over a five-year horizon, barely half of the funds that survive remain?.
In simple terms, most US fund managers are not ?consistent in their original style box?, ie their investing style is swayed by marketing or market-based sentiment. I would maintain that the biggest casualty of this ?style drift? has been contrarian, value investing (outside of a dividend focus) which is suffering something approaching a slow and lingering death.
Contrarian value types have been hit by a triple whammy. Many contrarians tend to run smaller funds that frequently cannot afford to spend proper money on detailed company research and have ended up shifting to large-cap stocks with greater visibility, apeing an approach that is essentially a cheapo version of growth stocks but at a reasonable price.
The markets have not rewarded value investors, and especially not contrarians. Illiquidity is out, and ?quality? and ?liquidity? is in. As a result, value stocks have underperformed over a large part of the cycle, and the ?value? anomaly (as it is called) is slowly fading away into obscurity.
Surely we are due a contrarian, value-driven revival? Time perhaps for a tightly focused, stock specific, ?bet the bank? contrarian fund of just 20 stocks from characters like Mr Mundy?
David Stevenson is a Financial Times columnist, editor at Portfolio Review and consultant. Follow him on Twitter @advinvestor
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