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No pain, no gain: five selectors name their best contrarian calls

Investment professionals reveal when they stuck to their guns and it paid off.

Swimming against the tide

Picking an out-of-favour manager may prompt investors to question your selection methods but which funds have you stood by and benefited from despite all signs telling you to sell out? Who repaid your faith in their potential and became a top contrarian call?

In the first of a two-part piece, we hear from five leading fund selectors about which managers they put their weight behind when all signs seemed to be pointing towards the exit. Read on to find out whether you shared their anti-consensus sentiment.

These comments originally appeared in the June edition of Citywire Selector magazine.

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Volker Hergert, LGT Capital Management (Switzerland)

We take a long-term approach which looks beyond the noise of short-term performance. A manager’s performance tends to mean-revert over shorter periods and therefore, as long we remain convinced about the investor’s skill, we do not sell after a few quarters of below-average returns.

In Europe we have been with Nicolas Walewski’s Alken European Opportunities fund for nearly a decade. In the nine quarters from March 2014 until June 2016 this formerly successful manager underperformed by 9% a year due to several wrong decisions. Many investors sold out at the time and lost a significant amount of assets.

We were concerned about the performance and monitored the manager’s actions closely. Over the course of the summer our conviction returned as Alken continued to play its reflation theme, and since June 2016 the mandate has outperformed by 17% and is fully back on track.

In the US, we invested in Polen Capital at the end of 2016 after the manager had a terrible year and relative performance lagged 10% as its long-term growth/high quality style temporarily fell out of favour. However, year-to-date the investment is 6% ahead of its benchmark.

Elsewhere, we started a Japan mandate with Morant Wright at the beginning of March 2011 after the manager had endured six bad quarters with underperformance of 4% a year. We viewed this as a short-term effect and the mandate went on to benefit from the change of market focus after the Fukushima accident later that month. Since inception the strategy has outperformed by 2.5% a year.

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Alistair Campbell, Sarasin & Partners (UK)

Julius Baer EF Euroland Value is a deep value fund that aims to identify stocks trading at a significant discount to their intrinsic value. We made a contrarian call to allocate to the strategy in 2015 as we felt that market sentiment towards Europe was overly bearish, particularly towards traditional value sectors such as financial and industrial stocks.

Following our allocation, these sectors continued to underperform, and this was particularly acute in early 2016. It is natural at this point to question whether your thesis is wrong and tempting to exit positions when they become too painful. Following a meeting with the fund manager our conviction increased and we were rewarded handsomely, as value rebounded strongly through the rest of 2016 and the fund outperformed significantly.

Despite the disappointing start to the year, the fund out-stripped its benchmark by more than 20% over 2016. We found this a useful reminder that you need enough conviction to stick with your managers through the tough periods, as often the moment of maximum pain is the one that brings maximum opportunity.

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Thierry Carabin, ING Private Banking (Luxembourg)

More and more investors have a shorter-term view. This trend makes it increasingly difficult to take a contrarian bet and intensifies the pressure to buy the winners and sell the losers.

Last December we invested in the Henderson HF Euroland fund managed by Nicholas Sheridan. We knew that Sheridan was overweighting France and this position became a contrarian bet as the French election saga gathered pace, during which time he increased his French exposure further to 39.37%. After the first quarter the fund had underperformed its benchmark by 1.86%.

We met with Sheridan to discuss this short-term underperformance before the first round of the French election, and decided to hold the position. During April the fund outperformed by 2.27% and we have the rest of the year to come. In this case, the market’s development made this bet contrarian, as well as our European small-cap exposure from last year via the Threadneedle European Smaller Companies fund.

This strategy underperformed against large caps in 2016 but has done very well so far this year. We took another type of contrarian bet with the Threadneedle US Contrarian Core Equity fund, which invests in stocks that have underperformed and for which the market has an excessively pessimistic outlook.

Elsewhere, the UBS European Opportunity Unconstrained fund, managed by Max Anderl, could prove an excellent contrarian play. The fund is a 150/50 strategy which is mainly long quality and growth stocks and short deep value or poor quality stocks. Last year was terrible as the fund was wrong on both sides.

It underperformed its benchmark by more than 10% but if markets go down or look likely to so on companies’ earnings this negative trend could reverse sharply. Overall, 2016 was very poor for stock pickers compared with passive solutions, which begs the question: do we now have to consider most of our active investments as contrarian bets?

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Surakiat Kahaboonsirihansa, Bangkok Bank (Thailand)

With almost all assets and regions experiencing bull markets this year, it has been difficult to find opportunities which measure up to the three ‘Us’ of a contrarian bet: undervalued, underperforming and under-owned. Global equities have performed well with YTD returns of nearly 10%. The market has also switched out of technology and cyclical sectors into defensive ones.

In Asia, we have an overweight position via the Invesco Perpetual Asian Equity fund which is benefiting from economic recovery in the region. Thai equities have not performed as well as Asian ones but I think ASEAN equities in Thailand, Indonesia and Philippines are still attractive despite below-average foreign inflows.

Contrary to the Fed’s expectations, short to medium-term yields have risen, while long-term yields have declined. If the drop in spread continues, high yield bonds will underperform. Therefore, we should focus on short duration, high grade bonds.

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Patrick Good, Key Capital (Ireland)

When a fund manager underperforms, we look at how their decisions measure up against their own investment framework. If they have deviated from their team’s internal guidelines this would be an immediate red flag for us.

Defined investment frameworks are becoming a rare commodity as equity funds we review now seem intent on delivering benchmark outperformance each year in response to the passive fund threat, rather than accepting short-term underperformance. Ultimately, we feel that basing our allocation decisions on something tangible, such as a clear investment framework, provides a strong foundation for committing to a fund manager’s own skill and conviction.

Recently one of our managers, Alexander Darwall, who runs the Jupiter European Growth fund, underperformed his benchmark. However, his clear and consistent communication showed he was sticking to his process – the same framework which formed the basis for our initial allocation decision. We continue to back the fund and expect its proven investment thesis will continue to deliver long-term outperformance.

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Related Fund Managers

Nicolas Walewski
Nicolas Walewski
161/596 in Equity - Europe (Performance over 3 years) Average Total Return: 33.72%
Alexander Darwall
Alexander Darwall
35/596 in Equity - Europe (Performance over 3 years) Average Total Return: 48.61%
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