Contrarian options are the great alternative for non-conformist investors who are willing to go against the herd. Recovery or Special Situations fund home in on regions or sectors that are out of favour with other investors or temporarily unloved, but which could offer a golden opportunity.
Considering worries over a no-deal Brexit, the likelihood of a German recession and the possibility of a new Italian general election, it is not surprising that the UK and Europe have been fertile hunting grounds for contrarians of late. Concerns about the effects of a slowing Chinese economy on an export-driven autos sector has turned many investors off, while others are worried about the outlook for the UK high street and struggling retail sector.
Merian UK Smaller Companies
The Gold-rated Merian UK Smaller Companies looks right down the market capitalisation spectrum for hidden gems and even has a small proportion of its assets in unquoted companies. Manager Dan Nickols looks for businesses that can grow their earnings faster than the average company in their market and have the potential to generate a positive surprise for investors.
The portfolio covers a range of sectors; in the competitive online retail space, Nickols likes clothes website Boohoo, while other top holdings including exhibitions and information provider Ascential, and Smart Metering Systems, which is looking to tap into the move towards smart energy meters in UK homes.
Nickols says companies can quite often be out of favour for no reason but thinks smaller companies are an exciting area in which to invest businesses are often poorly-researched. “The companies in our investment universe tend to be quite immature and are quite early in their corporate life cycles, so their latent ability to grow at a much faster rate than more established businesses is very much there for us to exploit,” he adds.
Morningstar analyst Samuel Meakin says the fund has been stable and successful over the long-term; indeed, it has delivered an annualised return of 14.6% over the past ten years.
Schroder Recovery
Another UK-focused fund, Nick Kirrage and Kevin Murphy have a strong history of producing consistent returns with their strategy of finding companies that have suffered a severe setback, but which they believe are due a turnaround. The duo look for businesses they believe are undervalued by the rest of the market.
Morningstar analyst Peter Brunt says the Silver-rated fund is “one of our higher-conviction ideas within the deep-value UK equities space”. He rates the strong relationship between the two managers and their sound investment philosophy, which incorporates a number of factors to try and eliminate so-called value traps – stocks which are cheap, but for good reason.
Currently almost a third of the portfolio is invested in financial services firms including HSBC and Standard Chartered, with other top holdings including oil giant BP and education publisher Pearson.
Brunt says investors may need to tolerate greater volatility when investing in value and recovery funds, particularly as a value style of investing has lagged growth-focused funds in recent years. Highlighting this - the fund is down 3.3% year to date, but has delivered annualised returns of 9.2% over ten years.
Crux European Special Situations
While Europe remains out of favour with many investors, Richard Pease, manager of the Crux European Special Situations fund, points out that stocks in the region have soared.
The manager looks for companies experiencing temporary problems and says the best investments are often those which feel the most uncomfortable. A recent example is Swiss drug giant Novartis, which has accused of manipulating data earlier this year.
Pease left Janus Henderson after seven years at the business to set up Crux in 2015 and as part of the move, was able to take the Henderson European Special Situations fund with him to his new firm. Morningstar analyst Muna Abu-Habsa says: “[Pease’s] experience in European equities dates back nearly three decades and over this time he has demonstrated robust stock-picking skills, following a disciplined process that is predominantly bottom-up”.
The Bronze-rated fund has delivered annualised returns of 10.5% over five years and has a relatively concentrated portfolio of 60 holdings, with around 60% of assets in eurozone countries. Top holdings include Luxembourg real estate firm Aroundtown and Finnish life insurance group Sampo Oyj.
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