That is the opinion of Sanjeev Shah, manager of the Fidelity Special Situations fund, who explained his reasoning in an FE Trustnet article earlier today.
Bestinvest’s Jason Hollands agrees with him and points to Shah’s own recovery last year as evidence that this process is already happening.
Here FE Trustnet looks at five funds that have stuck to their style during a bad period and could be ready to reap the benefits of a more favourable market.
Jupiter Undervalued Assets
Hollands says this fund recovered strongly last year for similar reasons to Shah's – its strategy of buying undervalued stocks started to pay off again.
Data from FE Analytics shows that the fund is bottom quartile over five years and has slightly underperformed the sector average over three.
However, over the past year it has powered ahead of the IMA UK All Companies sector, making 27.07 per cent while the sector is up 14.72 per cent.
Performance of fund vs sector and index over 1-yr
Source: FE Analytics
Its renaissance coincided with the appointment of Steve Davies as fund manager in January 2012.
Like Shah, Davies has prospered from positions in the banks. Lloyds, the best-performing FTSE 100 stock last year, is his biggest holding at 6.7 per cent, while he has 6.02 per cent in Barclays and 5.06 per cent in HSBC.
He also holds ITV and TalkTalk in his top-10, both of which Shah holds.
The fund requires a minimum initial investment of £500 and has a TER of 1.78 per cent.
M&G Recovery
Tom Dobell’s £7.4bn M&G Recovery fund splits opinion. Over one and three years it is bottom quartile in its IMA UK All Companies sector, but its excellent returns in earlier years mean it is still top quartile over the past decade.
Some experts think its poor form has gone on too long, but others think that it is suffering from an unfavourable market and Dobell’s long-term track record justifies holding on.
Rob Morgan, investment analyst at Hargreaves Lansdown, said: "Our philosophy is that if a manager who has a good record goes through a tough time but sticks to his process, when the tide turns they could be poised to do well."
"That could be what’s happened with Tom Dobell."
"Many of the areas he invested in were turnaround opportunities and commodities and they haven’t done him any favours, and they could be areas that continue to be unloved for some time."
"However, at some stage he will be due a renaissance."
However, Dobell’s fund performed poorly over the last year when Shah’s fund was starting to rebound.
Performance of fund vs sector and benchmark over 1yr
Source: FE Analytics
This may be in part due to their differing views on commodities: Shah views them as likely to take off at a later point in any economic recovery once the business cycle turns, which he does not foresee for four or five years yet.
The fund requires a minimum initial investment of £500 and has a total expense ratio (TER) of 1.65 per cent.
Fidelity China Special Situations
Shah’s predecessor on the Fidelity Special Situations fund was Anthony Bolton, who left to set up this closed-ended fund which is focused on China.
The fund was launched in early 2010 and initially did poorly, losing more than its index in a tough time for the Chinese stock market.
However, over the past year it has rebounded strongly and has beaten its MSCI benchmark with returns of 11.03 per cent to 8.81 per cent.
Performance of trust vs index over 1yr
Source: FE Analytics
Morgan explains that some of the reasons often given for Bolton’s underperformance were wrong, and he may have been suffering from sticking to his style in a difficult market for smaller companies.
"On the China fund he’s heavily into smaller and mid cap stocks, but I think it still holds that these areas of the market have underperformed compared to larger companies."
"The local China market has been a worse place to invest than through Hong Kong, which many of the large funds use."
"Those have suffered less than Anthony Bolton and the small cap stocks that he favours, which tend to be traded in China itself."
"He used to invest in smaller companies on Fidelity Special Situations. He didn’t have any particular view on market cap size."
"The argument is if you are a contrarian value investor you can apply your process in any market and drill down to the stock-specific level."
"He did the same thing on a European fund as well as in the UK. He also used to invest in emerging markets stocks, which is something that is not often brought up."
The trust had a TER of 1.7 per cent last year, and has a performance fee.
Legg Mason US Smaller Companies
"It’s value-driven and although its numbers have been good, it has had a tough time in relative terms compared to its peers," Morgan said. "It has been in energy and technology stocks that haven’t done very well but could be due a re-rating."
The US market has had a strong run in early 2013, with data from FE Analytics showing that it is up 13.22 per cent in the year-to-date.
Performance of index in 2013
Source: FE Analytics
Morgan explains that the sectors that are leading the market up are financials and property companies, but that the good news could soon spread to manufacturing and industry.
Labour competitiveness has increased, pulling jobs back to the US, while cheap natural gas is a boon for industry.
Morgan says that this fund is in the right sectors should that happen.
Data from FE Analytics shows that the fund has made 37.06 per cent over three years and 64.79 per cent over five.
While these numbers are quite strong, they compare with 50.88 per cent and 71.23 per cent for the IMA North American Smaller Companies sector.
The fund requires a minimum initial investment of £3,000 and has a total expense ratio (TER) of 1.73 per cent.
Aberforth UK Smaller Companies Trust
Tom Tuite Dalton, investment trust analyst at Oriel Securities, explains that this trust has suffered from sticking to its value disciplines.
It is heavily overweight the smaller end of the benchmark as that is where the managers have found the most value; this is also what has held performance back.
However, Tuite Dalton thinks that this trust is already seeing a turnaround in performance.
"Aberforth Smaller Companies’ relentless focus on value has resulted in disappointing performance over the last five years," he said.
"However, there has been a notable improvement in performance over the last two years and we are hopeful that this may continue through 2013 and beyond."
The trust saw a total return on NAV of 32 per cent last year, higher than the 30 per cent of the NSCI benchmark.
It still languishes on a discount of 12.4 per cent, according to data from the AIC.
Tuite Dalton thinks that the sectors it invests in are recovering and on valuation grounds "the odds are stacked in Aberforth’s favour".
The trust has a TER of 0.81 per cent.