CONTRARIAN INVESTING
I outperform rival funds because when it goes right I make a lot of money for investors
GOING against the crowd can be a risky business as an investor, but the strategy can reap great rewards if you are astute and proven right. Contrarian investors seek out shares that are out of favour with the majority. It is not a common approach – usually if something is out of favour there is a good reason. But a few specialist fund managers have a proven track record at finding opportunities that no one else has spotted.
Alex Wright is a contrarian. He is manager of £ 3 billion investment fund Fidelity Special Situations, made famous by legendary stock picker Anthony Bolton in the 1990s and 2000s. He also manages investment trust Fidelity Special Values and investment fund Fidelity UK Smaller Companies.
Wright says: ‘I look for companies to invest in where all the analysts are recommending for investors to sell their shares, where many investors have a short position betting against the shares falling in value, and where people have an openly negative view. These are signals that prick my interest.’
One of his best ‘contrarian’ investments was in video game maker Electronic Arts.
The business, which makes popular games including Fifa and The Sims, was regularly voted the worst company in America by both employees and shareholders. There were also major concerns about whether the rise of smartphone app games would be the end of the video games industry.
Wright bought shares in October 2012 when the share price fell to $11.41 (£8.62). But Electronic Arts then brought in new management, increased sales and introduced digital downloads of its games. By the end of 2016, the share price had rocketed to more than $80 (£60) although by that time Wright had banked profits for the fund.
Wright admits a contrarian investment approach is not an easy one to adopt and quite often things go awry. Investing in abroad range of companies helps smooth out overall performance when some stakes go wrong. He says: ‘If you look at my batting average, I get it wrong more often than I get it right, but I still outperform rival funds because when it goes right I make a lot of money for investors.’
The reason for this is quite simple. If everyone thinks a company is going to do well and then something goes wrong, its share price plunges because investors panic. But if everyone thinks a business is going to do badly and it surprises them by doing well, the company’s shares can soar.
Wright invested in luxury goods company Mulberry when it fell out of favour with investors in the wake of the financial crisis in 2009 amid concerns that cash- strapped consumers would stop spending on fancy handbags. He bought shares for 65p and sold just two years later after they had risen an incredible 2,000 per cent.
He says: ‘I tend to sell shares a bit too early. As a contrarian I start to worry when things are going well and a company starts to gain other people’s interest.’
When you are choosing companies to invest in, you might look at those which have seen recent sales grow and profits rise – and where the share price is soaring. Contrarian fund managers prefer bad news. But bad news does not always mean an investment opportunity. Lots of investors are currently betting against high street retailer Marks & Spencer but Wright agrees with them as the company is grappling with online competitors and falling footfall.
Mike Clements, manager of investment fund Oyster Continental European Selection, is also a contrarian. His fund is an example of how this style of investing can be difficult in the short term. The fund is up 46 per cent over three years but has had a difficult past 12 months. If you had invested £10,000 a year ago, your investment would now be worth £9,180.
One of his best contrarian calls was an investment in luxury goods firm LVMH, which owns 70 brands including Louis Vuitton and Marc Jacobs. Its share price fell amid fears that demand for its products would ease off in China where the economy was slowing. But that has not been the case and earlier this year the firm’s share price reached a new high.
But an investment in French company Technicolor did not work out so well. The firm is a world leader in special effects for Hollywood movies, but also owns a business which makes broadband routers. This has struggled because of rising costs. Its share price has tumbled from €4.41 (£3.88) to €1.04 (93p) over the past year.
Other contrarians include Robin Hepworth, manager of Eden-Tree Higher Income fund. He is currently focusing on UK companies because of concerns about how Brexit will play out. One of his biggest investments is HSBC as he thinks banks will benefit as interest rates continue rising. His fund has turned £10,000 into £13,910 over the past five years.
Ben Peters is co-manager of Evenlode Income fund which has turned £10,000 into £17,890 over the past five years. One of his best investments was in technology company Microsoft.
He says: ‘We backed it in 2012 when it was widely hated. It was seen as a bit of a dinosaur. It had bought phone company Nokia which turned out to be a bad idea, and people thought it had lost its way.’
But Peters liked that it still had a large market share and was sorting out its online business. Two years later and the share price had more than doubled to $114 (£86.60). He adds: ‘Contrarian investing is a difficult skill. When you invest in a company and then read about how bad and out of favour it is, you can lose your nerve.’ He still holds Microsoft in the fund.