Fund Focus: the fund managers making contrarian bets

It’s often no fun being a contrarian investor. 

Had you crowed about markets looking overvalued in recent years, especially in the US, you would often have been frustrated - and missed out on some big returns. 

But taking a contrarian approach can eventually pay off, as investors in markets such as the UK have found in recent years.

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I’ve previously talked about the fact that classic value funds have started to look more like momentum plays lately, while funds with a quality growth style have found themselves focused on unloved assets. Now we are starting to see a few funds double down on out-of-favour investments.

A lot of this seems to centre on the software sector, which could either be an artificial intelligence (AI) victim or a winner from said trend, depending on your view.

To start with, HgCapital Trust Ord (LSE:HGT), one of the software sell-off’s big victims, last week announced an £11 million investment in Rightsline, which provides rights and royalties management software, as part of a bigger overall investment by manager Hg.

This is less than surprising given that HgCapital specialises in software businesses and, to put it bluntly, finds itself stuck with the sector. 

But it will be interesting to see how much money the trust deploys in the next year, and whether it puts more money to the work on the back of depressed sentiment. 

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The trust has also been busy attempting to portray its holdings as winners of the AI trend, and it’s notable that the announcement of this investment includes more than 10 “AI” mentions.

Another private equity trust that has taken some hurt in the software sell-off, Oakley Capital Investments Ord (LSE:OCI), recently announced an investment in XTEL, which provides revenue management and trade promotion software for consumer packaged goods companies.

The trust is much less exposed to software than the likes of HGT but the sector still accounted for 16% of the portfolio in its last set of results. Again, it will be interesting to see how this proportion changes over time.

Listed names

Assessing a private equity portfolio can be a real pain for DIY investors. 

The trusts issue updates on the value of their portfolio on a delayed basis, and there is sometimes disagreement about how reliable such valuations are in the first place. That partly explains why share price discounts to net asset value (NAV) can be so wide.

There are, of course, plenty of listed software businesses and these took a battering earlier this year. Here, we will see some funds either sticking with their positions in such companies or even adding exposure, and the examples are already emerging.

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Note that UK equity income fund Edinburgh Investment Ord (LSE:EDIN) has done exactly that, with its recently released annual financial report noting that the investment team had topped up on its position in Sage Group (The) (LSE:SGE). The fund does also hold London Stock Exchange Group (LSE:LSEG), another name hurt in the sell-off.

As the team said of Sage: “The business continues to deliver consistent growth, driven by its transition to cloud and increasing adoption of AI-enabled solutions, which are enhancing customer productivity and supporting pricing and upsell opportunities.

“We believe Sage is well positioned to sustain attractive growth and margin expansion, with AI innovation and a large installed base providing a durable competitive advantage.”

Having said that, it’s still a relatively small position, accounting for 2.7% of the fund at the end of March. As always, it’s the funds taking big bets that will either gain or lose the most on such companies, and as ever Nick Train’s Finsbury Growth & Income Ord (LSE:FGT) stands out for its software exposure.

The trust’s results, out last week, noted that data, software and platform companies accounted for 58% of the portfolio.

What’s interesting is that Train has stood by such companies – and that the trust has now pledged to up the ante by making greater use of gearing. It’s not clear which positions such gearing will be used on, but it should amplify the gains or losses the portfolio makes in future.

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Meanwhile, software is an obvious hunting ground for the contrarians but not the only one. 

Note that while some global fund managers have distanced themselves from the Magnificent Seven shares, Pershing Square Inc (NYSE:PS) manager Bill Ackman has been buying into some of them, most recently Microsoft Corp (NASDAQ:MSFT). With his concentrated positions, that could make a big difference to performance (depending on how it works out).

There are also various consumer goods companies looking to turn things round, from Diageo (LSE:DGE) to Unilever (LSE:ULVR), to watch. Fund managers will also be wondering what to do about BP (LSE:BP.), which has just ousted its chair in seemingly heated circumstances.