Contrarian buys can pay off when investing

We all expect fund managers to "talk their book" - essentially to extol the virtues of their particular investment decisions or processes. Naturally, they are generally much more prepared to talk about their successful calls than their duds.

So it is always refreshing to hear a fund manager talk about what has gone wrong as well as what has gone right - an example being Paul Mumford at Cavendish.

He told us that he has had "lots" of disasters, such as buying HMV at 155p and selling at 55p. That would be unfortunate if he were not a successful fund manager, but most investors in his funds wouldn't grumble.

He reckons if you're not making such mistakes as a fund manager, you're not taking enough risks. Mumford is a typical contrarian investor - someone who likes to buy sectors and individual stocks that have fallen out of favour.

The main problem with being a contrarian is that it can take a while for the investing herd to follow the direction you have already taken. You also need steely resolve - because you will often be asking yourself whether you've caught the proverbial falling knife (if prices keep falling) or questioning when prices will begin to follow the direction you've taken.

For example, Mumford told us he had taken a view on the depressed gold price and bought a stake in gold and silver producer Randgold Resources in the third quarter of 2013. But its share price fell by 20% in November and December.

Having hit a 52-week low of £36 on 10 January (from a high of £64.65 on 14 February 2013), the shares were up 14% seven days later. There's no guarantee that Mumford's contrarian call on gold and this specific gold-mining share will continue to come good, but it's a fine example of how going against the crowd can potentially work in your favour.

Promising contrarian plays

In our January Wealth Creation Guide I suggested gold as a contrarian call (while admitting it had been a rather expensive insurance policy in the past year). Apart from investing in physical gold bullion, two other fund investments appeal: Investec Global Gold fund and BlackRock World Mining investment trust.

The former has high exposure to gold mainly through Canadian gold-mining firms, and the latter is a more broadly based natural resources fund. Both have performed poorly in the past year, but both are also among our 2014 Rated Fund selections (the full list will be published next month) in the specialist commodity arena.

Certain areas of the poor-performing fixed-interest bond markets are also interesting to contrarians. One unconventional way to gain exposure is via Capital Gearing Trust.

It's a contrarian call because of its recent dull performance caused chiefly by the portfolio's 35% weighting to index-linked bonds. With markets more concerned about disinflationary, or even deflationary, forces, Capital Gearing's position in "linkers" is weighing on performance.

The portfolio also includes around 20% in preference shares and another 6% in global government bonds. Manager Peter Spiller believes global quantitative easing (QE) measures will eventually lead to high inflation and that the linkers have great potential for capital gains.

Spiller's chief priority is wealth preservation, although his long-term record is firmly in the wealth creation camp. This explains why shares in Capital Gearing have been trading at a premium to their net asset value (NAV) for several years, and this reached 17% last year despite some rather dull performance numbers.

Yet in early January the share price almost went to a discount to NAV (although it has since rebounded to a 7% premium). I would consider paying a premium of up to 5% to access Spiller's acumen via this trust.

The third contrarian call is Asia and the wider emerging markets. They were battered last year and sentiment could be further dented particularly if the US Federal Reserve starts to unwind QE more aggressively.

Fund group Schroders reckons a group of countries it dubs the "fragile five" - Brazil, Indonesia, India, Turkey and South Africa - are particularly sensitive to further QE tapering because they have short-term financing needs but rely on external finance sources.

Two routes appeal for a contrarian investor to exploit. The first is Sarasin IE Emerging Markets Systematic, a Dublin-registered fund that equally weights all 19 countries in the MSCI Emerging Markets index and rebalances them monthly. I profiled this fund last July.

The second route is via the multiple Money Observer award-winning Aberdeen Asian Smaller Companies investment trust. Last year the shares were trading on a 7% premium to NAV, but it has since fallen to a 5% discount. The shares are also down 10% over the past year, but as with all of the above ideas, underperformance or outright falling prices would be among the attributes a contrarian would be most interested in.

Looking for contrarian ideas

You can search for these on our sister website Money Observer's new unique fund and trust comparison tool. Ideally, you will want to search for either Money Observer Rated Funds or those with a relatively high FE Crown Rating.

You can include both options in your search and, uniquely, you can ask for both funds and investment trust results. After that, you can then search via one-year performance, ranked from lowest to highest, rather than the more intuitive highest to lowest ranking.