With most fixed interest asset classes seemingly out of favour for good reason, and perhaps at the tail-end of a rally in developed market equities, original ideas are in high demand. So what are the genuine contrarian ideas of today?
Investec Asset Management’s Alastair Mundy undoubtedly fits in to the bona fide contrarian camp being as he is head of the firm’s contrarian team.
He has over the past year reduced his Cautious Managed fund’s exposure to UK equities – where he says stocks have reached fair value – and has also taken a short position in US equities. Weakness in bond markets has also led him to an increased exposure to UK government index-linked bonds.
Modern concerns
However, he stresses he is concerned about what he sees as a “modern urge” to reduce volatility through seeking out supposed uncorrelated assets.
“A number of asset classes have been credited with uncorrelated features, but even during the mini sell-off of recent months, many of these investments have disappointed,” he says.
“This too is no big surprise to us. Uncorrelated assets are typically uncovered in back tests using periods when the asset class was not widely held. Unfortunately, as these assets enter the mainstream and are held by the masses, a number appear to lose their uncorrelated powers. If nothing else these are used as a ready source of cash in sell-offs, so ensuring their own demise.”
An asset class which arguably fits in to the uncorrelated classification is commercial property. As Gary Corcoran discussed yesterday, this relatively unloved sector should be back on investors’ radars. For an illiquid asset class, it makes sense to access this story via a closed-ended fund… and contrarians will be particularly alerted to those trading on discount.true
James Burns, head of multi-manager at Smith & Williamson, is one fund picker who has been investing this way in his MM Global Investment Fund. The biggest holding in the fund is Forterra Trust – until earlier this year known as Treasury China Trust – which invests in commercial property in Shanghai.
“I’ve been to China twice in the past five years to see the assets and it’s a really exciting story, which plays on the retail story, including shopping malls,” says Burns.
“It sits on around a 65% discount to NAV. Will I hold this in two years time? I hope not because that would mean it has gone to a much narrower discount and we’ve made a lot of money.”
Low-hanging fruit
Burns also favours private equity trusts trading on big discounts, such as HarbourVest Global Private Equity.
“A lot of the low-hanging fruit has already been picked, but by buying a highly-diversified private equity portfolio, which is churning off cash, they will make a commitment to return capital to shareholders and I expect that discount to come in further,” he adds.
Just because equity markets are up, it doesn’t mean value can’t be found. Nick Sketch, senior investment director at Investec Wealth & Investment, lists miners and other China-plays, financials and Russian equities as among those asset areas that are likely to offer growth to contrarians presently.
However, he warns that many individual investments in these areas will turn out to be deservedly unfavoured and the stock-specific risks will be high.
“As a result, genuine contrarians will always produce lumpy and volatile performance over short to medium periods, so potential investors will always need good managers, good judgement and patience,” he says.
Indeed, patience it seems is a real virtue when investing as a contrarian.
We will be exploring contrarianism in much greater detail in the forthcoming August issue of Portfolio Adviser, out soon.
