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Where are all the contrarian investors?

An update from Ediston Property Investment Company (EPIC) suggests it’s not just jaded commuters turning their backs on office life. Having operated as a generalist UK commercial property trust, Ediston will now turn its focus purely to investing in retail warehouses “for the foreseeable future”, following a review of its approach.

It should be stressed that this isn’t a sea change given that retail warehouses already made up some 70 per cent of the portfolio, and the move stems partly from a belief that such assets have become oversold despite good fundamentals. As Ediston’s board puts it: “Yields look attractive when compared to other property subsectors, often with income secured on high-quality companies.”

But this does offer an example of how trusts tend to evolve in line with investor demand and market conditions. Ediston will now focus even more closely on an area linked to the rise of e-commerce, while a plan to sell off the trust’s office assets will see it exit a subsector still facing great uncertainty amid the pandemic.

This is certainly a positive development in one sense – why not play the more promising trend, after all? But it also reminds us that contrarian investment strategies can be hard to maintain in the world of fund management. If Ediston is calling time on offices for now, there are plenty of examples of trusts moving away from troubled corners of the equity space, too.

Earlier this year, Scottish Investment Trust's (SCIN) board called for fund managers to pitch for its business after a lengthy bout of underperformance by the current team, whose value-minded approach has included not holding the FAANGs in a global equity portfolio. We’ve seen plenty of contrarians turn away from the UK too. Keystone Positive Change Investment Trust (KPC) transformed from a UK value fund into a vehicle for one of Baillie Gifford’s global teams, while high-profile value manager Mark Barnett walked away from Invesco last year after an extended period of underperformance. Others have missed opportunities to double down on beaten-up stocks: in the wake of the early 2020 Covid sell-off it appears that Temple Bar Investment Trust's (TMPL) board urged its then investment manager Alastair Mundy to derisk the portfolio by removing borrowing.

Given the number of times that I have just used the word “underperformance”, this all makes sense. But changing tack can mean (eventually) missing out on a rebound. If you held a trust as a contrarian play or as a diversifier to the consensus names in your portfolio, a change of strategy should perhaps prompt a rethink.

Fortunately, there are still contrarian options. Plenty of UK trusts, including the likes of Temple Bar, have stuck with a value approach and finally had something of a reprieve in recent months. Exposure to troubled parts of the property market is also available, if you have the stomach for it. Shares in BMO Commercial Property Trust (BCPT), which has a good chunk of exposure to offices and retail, have rallied aggressively in the last year. Even so, they continue to trade at a discount of around 20 per cent to net asset value (NAV), suggesting we are still a long way from consensus territory.