Citywire for Financial Professionals
Stay connected:

Citywire printed articles sponsored by:


View the article online at http://citywire.co.uk/money/article/a765885

Against the tide: the contrarian fund investors

Contrarian investing isn't just about identifying oversold shares - some fund pickers also like to stand out from the crowd.

 

by Jennifer Hill on Aug 05, 2014 at 12:00

Against the tide: the contrarian fund investors

Contrarian investing – identifying out-of-favour stocks the market is judging too harshly – is a famous method employed by some of the UK’s best investors.

But the philosophy doesn’t only apply to shares. Some multi-managers, whose job it is to pick the funds they think are going to outperform, use the same process for finding managers to back.

Here, contrarian investors outline the signals they are looking for before they buy an out-of-favour fund.

Jupiter’s independent funds team endeavours to identify investment styles that have been oversold.

‘You will often have to take a non-consensual view and that may mean investing with the manager at a time when others are giving him or her a wide berth,’ said fund manager Algy Smith-Maxwell (pictured). ‘It’s a strategy for the patient investor taking a medium-term view that the manager’s style will return to favour.’

Jupiter bought into the AXA Framlington American Growth fund, run by Stephen Kelly, in the 1990s. However, it sold it in 2000 amid the technology boom.

‘The technology and internet bubble overinflated prices for businesses, both good and bad,’ said Smith-Maxwell. ‘This was our chance to rebalance the ship and adopt a strong value bias.’

The team bought into M&G North American Value , run by Richard Brody, and Invesco Perpetual Income , until recently run by Neil Woodford.

‘The performance of these funds at the time was distinctly fourth quartile. Neil was also coming under a lot of pressure in the press for poor relative performance,’ he said.

Jupiter reinvested in Kelly’s fund from 2006 to 2013. ‘Tell-tale signs that the fund was out-of-favour were easy to spot: the fund had massively shrunk in size and we were told that meetings with fund-of-funds teams had been few and far between since the boom years,’ Smith-Maxwell said.

‘Over the seven years that we held the fund again it performed extremely well. In hindsight, we could have held onto it for longer.’

Attraction of underowned funds

As well as famous contrarian-style funds, such as Fidelity Special Situations and GLG Japan CoreAlpha , Thesis Asset Management holds underowned funds.

Citywire + rated Steven Richards, who manages the Thesis Optima Multi-Asset Strategy fund, said: ‘We specifically look for funds that others don’t own – this is how we can differentiate our performance from peers

‘Some of the names we invest with will be boutique, smaller funds that don’t have the reach of some of the bigger funds and, therefore, are not necessarily found in every portfolio.’

One example is JOHCM UK Opportunities , a Citywire Selection star pick managed by Citywire A-rated John Wood (pictured) and A-rated Ben Leyland. Thesis bought into it in 2007, when the fund was worth just £40 million. It took profits early in 2013, by which time it had ballooned to more than £1 billion.

One big advantage of being a large investor in a smaller, relatively unknown fund is the close relationship it fosters. ‘They tend to keep us well informed about what’s going on in their business, so we can make decisions accordingly,’ said Richards.

Fishing among underperformers

For Henderson’s multi-asset team, fishing in the pool of underperforming managers often reels in attractive opportunities.

‘High quality managers that have struggled in recent times are an attractive proposition, if you think the market backdrop is about to change in their favour and that they haven’t lost their mojo,’ said portfolio manager James de Bunsen (pictured).

‘We aren’t big believers in quantitative screens for funds for many reasons, but scanning through the bottom quartile in a sector over recent periods for managers that have strong long-term numbers might prompt us to revisit certain people.’

Henderson seeks to understand the reasons behind poor performance. ‘Issues such as personnel changes or corporate activity at their firms are important to gauge,’ said de Bunsen.

Earlier this year, his team increased exposure to Melchior Selected Trust European Absolute Return fund following a small negative return in 2013, which had otherwise been a positive year for long/short equity funds – those that can also make money by betting a share price will fall, or ‘shorting’.

‘[The fund] manager Leonard Charlton had a couple of stock-specific issues last year and was net short [so would benefit from a falling market] for much of the time when developed market equities rallied very strongly,’ said de Bunsen.

‘Our concerns about the sustainability of the equity rally and valuations in certain parts of the market, combined with his genuine ability to add alpha [market-beating returns] in his short book, persuaded us to increase our exposure [to Charlton’s fund] in the Henderson Multi-Manager Absolute Return fund. Thus far in 2014, the fund is doing well, outperforming most of its long/short peers,’ he said.

Thesis is continuing to invest in recent poor performer BH Global (BHGE ), which invests in global fixed income and foreign exchange markets. ‘In the past, it’s nearly always delivered when we want it to, especially during equity drawdowns,’ said Richards.

Backing conviction

In seeking out high-flying managers who are at the bottom of the heap, conviction is important.

GAM’s managed portfolios investment team cites River and Mercantile UK Equity Smaller Companies fund, managed by Daniel Hanbury, as a fund that has stuck to its stated style.

It found itself on one of a number of ‘dog’ fund lists in spring 2012. ‘Since appearing on that list, Hanbury’s fund has outperformed its benchmark [Numis Smaller Companies ex-IT] by 45.7% and the IMA UK Smaller Companies sector by an even more impressive 48%,’ said GAM investment manager James McDaid.

‘This goes to prove that managers can go in and out of style, and the upside opportunity of buying an unloved manager that sticks to his style at inflection points can prove very rewarding indeed.’

3 comments so far. Why not have your say?

Rob Walker

Aug 05, 2014 at 18:54

When I saw the headline of this article I thought I was going to learn a bit about out-of-favour companies whose shares were undervalued, but no. While we could read this article at face value there is a strong suspicion that this is just our City pals trying to give each other a helping hand by encouraging investment into failing funds and stem the tide of withdrawls by existing jaded customers. Funds might recover because they invest in specific sectors but for individual fund managers to exceed their peer group they have to make specific shrewd investments, so why don't we just focus on the shares they buy and sell?

report this

jon smith

Aug 06, 2014 at 22:44

yup!!!

report this

Trevor Smith

Aug 09, 2014 at 15:44

Surely fund managers under perform because they made poor stock buying decisions but in their own minds good ones.

To gamble that they would suddenly start making good stock buying decisions because they hate being in the doghouse is in my view being reckless with their investors' money.

It would be different matter if these fund of fund managers declare the amount of their own money they have invested in support of their views on poor performing funds

report this

leave a comment

Please sign in here or register here to comment. It is free to register and only takes a minute or two.

More about this:

Look up the funds

  • AXA Framlington American Growth R Acc
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • M&G North American Value A Inc
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • Fidelity Special Situations A Acc
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • GLG Japan CoreAlpha Retail Acc A GBP
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • Thesis Optima Multi-Asset Strategy Acc
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • JOHCM UK Opportunities A Acc
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • Melchior Selected Trust European Absolute Ret A1
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • Henderson MultiManager Absolute Return I Acc
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • Invesco Perpetual Income Inc
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • River and Mercantile UK Equity Smaller Companies A
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them

Look up the investment trusts

  • BH Global GBP (Ordinary Share)
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them

Look up the fund managers

  • Algy Smith-Maxwell
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • Richard Brody
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • Neil Woodford
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • Steven Richards
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • Ben Leyland
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • Leonard Charlton
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • John Wood
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • Daniel Hanbury
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • James McDaid
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them

Archive

From the Forums

+ Start a new discussion
Sorry, this link is not
quite ready yet