Contrarian investing explained
You may have heard the terminology ‘contrarian investing’, but what does it mean? In the same way that Mary was quite contrary, so too are several high profile fund managers, who are focused on finding long-term growth investments. In basic terms, a contrarian investor sees opportunity in trading specific investments when the majority of investors are doing the opposite.
How does it work in practice?
Contrarian fund manager Alex Wright describes his process: “I look at unpopular and undervalued shares, I try to out-analyse or look at things differently from the market”. Two key elements to his strategy are downside risk management and unappreciated growth potential. He targets firms with cheap valuations and looks for events that could significantly improve their earning power but are not currently reflected in the share price. These factors include changes in the market in which the company operates or developments affecting competitors.
Strong research and analysis of stock fundamentals is essential. Managers are looking for balance sheet strength, a solid management team, innovative products, efficient processes and good profit margins– and the ability for a company to maintain these fundamentals.
Bottom-up stock picking
Contrarian investors tend to be bottom-up stock pickers, an approach which concentrates on the analysis of individual stocks, overlooking sector or macroeconomic factors and selecting a stock based on the individual attributes of a company. Once a stock is purchased in a fund, the manager will tend to consolidate the position; the skill then is selling at the right time, hopefully following a period of growth, without missing too much upside potential.
Contrarian managers continue their pursuit for strong companies with good growth prospects, in a bid to prove that going against the herd has its benefits and can help grow your portfolio.
As with any investment strategy, there are no guaranteed returns with this method. The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.
It is important to take professional advice before making any decision relating to your personal finances. Information within this newsletter is based on our current understanding of taxation and can be subject to change in future. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK; please ask for details. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from taxation, are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor.
The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated. If you withdraw from an investment in the early years, you may not get back the full amount you invested. Changes in the rates of exchange may have an adverse effect on the value or price of an investment in sterling terms if it is denominated in a foreign currency.