With falling markets, high inflation and the euro still at risk of disintegrating, for investors it must seem like there is no good place to turn. So could now be the time to put your money with a contrarian who might find an opportunity in the madness?
Contrarians are typically investors who buy investments that are cheap because they are out of favour, but believe that market sentiment is wrong and the investment will come good. This approach can be very successful and some of the biggest names in the investment industry have made their reputations by doing this; examples including US investor Warren Buffett, and Anthony Bolton over the 30 years that he ran the Fidelity Special Situations Fund.
"We certainly believe that the contrarian investment philosophy has strong credentials," says Gavin Haynes, managing director at wealth manager Whitechurch Securities. "It is particularly effective during peaks and troughs, with the contrarian likely to sell during a bubble and buy when investors are unduly pessimistic about an area, and this can result in excellent outperformance over the long term."
However, these great records did not come without some pain along the way, and not all so called contrarians succeed.
"I like contrarian managers because they are brave enough to look for value where others don't, but history is littered with ones who have not been given a chance," says Robert Burdett, co-head of the multi-manager team at Thames River Capital.
He cites the case of Tony Dye, former chief investment officer of fund manager Phillips & Drew who avoided shares largely holding his clients money in cash amid the late 1990s boom. This caused clients to withdraw their money and the company to retire him early in 2000. But within a month of his departure the stock market turned, with internet and telecom shares plunging.
Because you may have to wait a while to reap the returns there isn't really a good time to invest in a contrarian fund. You have to be in for the long haul.
"You don't flip in and out of contrarian funds as their managers don't chase short-term returns," says Mike Horseman, managing director of Cockburn Lucas. "Their view could take a year or more to come to fruition. Returns are also likely to be lumpy as there are spurts when they are right and times when the bet takes longer to come good, which could take months or longer. You can't ditch it after two months as you get periods of fabulous outperformance and periods of underperformance."
Investec Asset Management, which has a contrarian team led by Alastair Mundy, describes itself as investors not speculators with long holding periods of typically four to five years. An advantage of this long-term approach is that the turnover is low in the funds it runs, which reduces trading costs and eats less into profits.
"No investment process works in all market conditions," they say. "There must be market conditions under which each process works best and when it works less well. Our contrarian process is most likely to underperform in the final leg of a mature bull market, when investor overconfidence leads to a small number of stocks or sectors becoming significantly overpriced, as happened during the dotcom bubble of 1998-99 and the mining bubble of 2007-08."
The downside of contrarian investing is being caught in a value trap, if there is not a recovery opportunity. Read our interview with Mr Mundy on how to avoid value traps. Despite overall success, Mr Mundy says he has made mistakes – for example, selling Anglo Irish Bank too early and Jessops too late. Read the full interview
And while Anthony Bolton had great long-term success with his Fidelity Special Situations Fund, he is not doing so well with his China Special Situations investment trust. However, this fund only launched two years ago, which is not really a long enough time horizon for a contrarian manager, added to the fact that it invests in an emerging market where you should have a minimum investment time horizon of five or ideally 10 years. HSBC Global Asset Management, for example, remains positive on emerging markets, despite investor concerns and a sell-off. "Overall, we believe that the sell-off has exposed long-term value in emerging markets assets, particularly equities and currencies," says Philip Poole, global head of macro and investment strategy at HSBC Global Asset Management. "For investors that can look beyond this short-term volatility, we believe that valuations in emerging markets equities and currencies represent a buying opportunity over a 12-month horizon."
Mr Bolton's successor to the UK-focused Fidelity Special Situations Fund, Sanjeev Shah, has also not had a good run. He has managed this fund for four years but over one and three years it is not holding up against the FTSE All-Share and is trailing the average return for a UK All Companies sector fund, placing it in the 25 per cent of lowest performing funds.
However, Mr Haynes says: "While contrarian investing will not always be successful as the market is often efficient and most areas may be correctly priced a lot of the time, now is a good time to follow this approach. This philosophy is particularly effective during inflection points, and I think we are in an investment climate where investors are overly pessimistic on the long-term prospects for equities, with some exceptionally cheap stockpicking opportunities and strong recovery prospects."
The genuine article?
Contrarians do not always do things that differently to other managers. "Most fund managers try and buy the shares they want cheaply, but there are not many who are real contrarians," says Mark Dampier, head of research at broker Hargreaves Lansdown. "In a way, income fund managers are sometimes contrarian when they buy stocks that are out of favour but have a yield above the market average."
Adrian Lowcock, senior investment adviser at Bestinvest, argues that there is little difference between contrarian and value managers, so managers such as Tom Dobell and Neil Woodford could be described as contrarian.
Mr Woodford, considered to be one of the UK's top managers, does not label himself as contrarian but is sometimes classed as such because he has refused to go with the consensus a number of times. This has resulted in a great long-term record but also underperformance and criticism over certain shorter periods such as in 2009 when cyclicals rallied but Mr Woodford refused to join the so-called 'dash for trash'. This paid when markets came off and Mr Woodford's High Income and Income funds were the top two performing UK equity income funds in 2011, with their long-term record unblemished.
