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Little-known funds the experts are backing for contrarian investors

29 April 2015

Fund buyers from Old Mutual Global Investors, Premier and Hawksmoor highlight their most contrarian picks for the current environment.

By Alex Paget,

Senior Reporter, FE Trustnet

History has proven that while it will almost inevitably make you hate your decision at certain points, taking a contrarian approach to investing can often be a successful strategy if you stand by your convictions.

Just think of the returns the once-hated small cap funds have delivered since the markets bottomed after the financial crisis in March 2009 or the strong gains UK direct commercial property has made since mid-2013.

Clearly, taking a punt on a bombed-out area of the market is only for investors who have the stomach to deal with potentially high volatility or, even more simply, the room for a more satellite holding within their portfolios.

However, given the constant stream of bearish comments that investors have had to deal with over recent months due to macroeconomic woes and frothy valuations, FE Trustnet asks three leading fund buyers which severely out of favour and lowly-valued areas they have been turning their attention to.

Though these funds may put off certain investors given their esoteric nature and often higher charges, the three experts believe these active managers are their best option to take advantage of the low valuations on offer.

 

JPM Latin American Equity

First up is Old Mutual Global Investors’ John Ventre, who has recently started buying the £657m JPM Latin America Equity fund, which is headed up by Luis Carrillo.

Carrillo has run the four crown-rated fund since March 2003 and it has outperformed its MSCI EM Latin America benchmark over one, three, five and 10 years, according to FE Analytics.

 

 

Source: FE Analytics

The region has been through a very rough patch over recent times as slowing economic growth in China – which has caused the price of raw materials that Latin America exports to weaken – and a lack of political reform have weighed on markets.

On top of that, the huge fall in the oil price has caused sentiment towards energy exporting nations like Brazil to turn increasingly negatively. All told, the MSCI EM Latin America index is down close to 20 per cent over three years while the wider MSCI AC World index is up more than 50 per cent.

While consensus predicts that the region will continue to struggle and though Ventre is by no-means overweight the asset class in his portfolios, he has increased his weighting to Latin America as there is a more reformist policy agenda on the horizon in Brazil and because valuations are very cheap.

Given the market is so lowly valued, Ventre believes Carrillo’s approach is very well suited.

“I think the advantage he has is the ability or willingness to shut his eyes, hold his nose and buy something that is pretty low quality but is so cheap that there is a good money-making opportunity there anyway,” Ventre explained.  

“We value that kind of pragmatism in our managers. It’s great to have a philosophy and a way of doing things and you can do well like that, but you can perform much better by not ignoring obvious money-making opportunities.”


For example, Ventre says Carrillo has been buying Brazilian state-owned banks even though he “hates” the companies, just because they are so cheap. Our data shows the fund is overweight Brazil and more economically-sensitive areas of the market such as financials and industrials.

Its ongoing charges figure (OCF) is 1.1 per cent.


Polar Capital Global Financials

Next up is Richard Scott at Hawksmoor, who says the Polar Capital Global Financials Investment Trust is a very good opportunity for investors who are willing to stomach volatility.

While there have been periods over the past six years when banks have delivered very strong returns, they have always been somewhat of a contrarian play given the part they played in the build-up to global financial crisis and share price performance during it.

Also, though economic growth seems to be improving, their high beta characteristics to the currently toppy wider market and the tighter regulatory environment they are now operating in mean most investors are steering clear of the sector.

Nevertheless, Scott has recently bought into the closed-ended Polar Capital fund to take advantage of the low valuations on offer.

“We think this closed-ended fund is an attractive, well managed play on an unloved sector. The trust was launched in mid-2013, and traded at a significant premium to its net asset value for a while, prior to falling to a discount in the second half of last year when financials fell out of favour,” Scott said.

According to FE Analytics, the trust’s NAV returns have largely been in line with those of its MSCI World Financials benchmark since its launch in July 2013, but due to a widening discount it has considerably underperformed from a share price point of view.

Performance of trust versus index since July 2013

 

Source: FE Analytics

This means the trust is now trading on an 8 per cent discount – having traded on a 2.3 per cent premium at points over the past 12 months – and its dividend yield is more than 3.5 per cent. As a result, Scott says the trust looks very attractive.

“Its lead manager, Nick Brind, has an excellent long-term track record and in the context of a fairly risky sector has a very risk-aware approach.”

“We have bought a holding for our Vanbrugh fund and it accounts for 2.1 per cent of the portfolio. The trust has a globally diversified portfolio, with around half of its assets in banks. This is a great way to get actively managed exposure to a contrarian area where a lot of good value can be found.”

“Moreover, given the risks in the sector it is sensible to access the opportunities with a proven expert like Brind.”

Polar Capital Global Financials has gearing of 4 per cent and ongoing charges of 1.09 per cent.   


Renasset Ottoman

The final contrarian fund pick on the list is from Premier’s Simon Evan-Cook, who holds a modest position in the £46m Renasset Ottoman fund – which invests exclusively in Eastern European markets which are dominated Poland, Russia and Turkey.

Investors will be well aware that the Eastern European markets have faced significant problems over recent years.


As a result of the conflict in Ukraine, the plummeting oil price and its knock-effects on the Russian economy, the region’s equity indices were hit with losses last year. However, given the valuation support on offer, Evan-Cook says now is an interesting time to look at the fund.

“In light of recent events, these markets – particularly Russia and Turkey – have fallen out of favour, and now offer cheap valuations,” Evan-Cook said.

“While as a domestic market, Turkey boasts some of the most appealing demographics in either Europe or Asia. However, cheap valuations are not enough and we would not blindly hold an Eastern European ETF, as we would be exposed to plenty of companies that should be avoided at all costs.”

“This is why we have picked this highly active fund, as its manager, Aziz Unan, pays no attention to the unsavoury benchmark, adopting a conservative, quality-and-valuation-driven approach to this tricky part of the world.”

Unan has managed Renasset Ottoman since its launch in May 2003, over which time it has nearly tripled the returns of its MSCI Emerging Markets Europe 10/40 benchmark with gains of 61.22 per cent. The fund is also outperforming one, three and five years.

Performance of fund versus index since May 2006

 

Source: FE Analytics

The manager, who has the ability to take short positions within the fund, is underweight Russia and severely underweight Poland. His overweight bets include Turkey, Czech Republic and even Ukraine.

Its OCF is 1.57 per cent. 

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