In the Chinese Year of the Snake, the era of independent thinkers, John Monaghan, Research Director, Square Mile Investment Consulting & Research, looks at five funds run by managers who take a contrarian or high-conviction approach to running their strategies.
From 29 January 2025, the Chinese New Year ushers in the Year of the Snake. Those born under this zodiac are said to display a range of character traits including wisdom, charm and intelligence. They are also independent thinkers, ready to follow their own judgement rather than the opinions of others, and they are frequently right in doing so.
This tendency rhymes with those fund managers who prefer to adopt a contrarian or high-conviction approach to running their strategies, looking for opportunities in areas of the market that are shunned by others and rejecting herd mentality.
This approach may require investor patience and a level of faith as their funds may look and behave differently to comparable strategies and may lag the crowd during some stages of the market cycle. Moreover, it can take time for the wider market to recognise the opportunity inherent in their portfolio holdings, but those willing to invest over the longer-term should be well-rewarded.
Without speculating about the sign of the zodiac of those responsible for running them, here we highlight five funds whose managers invest with conviction and are unconcerned that their portfolios may differ markedly from those of their peers.
The team responsible for the Square Mile A-rated Federated Hermes Asia ex-Japan fund prefer to hunt in areas of the market which other investors in the region tend avoid to deliver capital growth to investors. Lead manager, Jonathan Pines, is committed to his investment style which could be described as opportunistic, seeking to unearth ideas where there is a discrepancy between the market’s valuation of a company, and that which his team’s analysis suggests. He is also sensitive to any potential losses and so seeks the reassurance of a margin of safety. His largest positions tend to be where risk/reward is considered positively asymmetric – the lowest downside risk with the highest safety margin. The team is free to explore opportunities across the market capitalisation scale, typically in areas that are either overlooked by other investors, or those that are inaccessible to more mainstream funds, particularly among small and mid-caps.
The AA-rated Invesco Tactical Bond fund might appeal to investors seeking a high-conviction approach to allocating to fixed income. Its managers are not afraid to express their opinions through the fund’s positioning and their philosophy stands on the premise that while markets are mostly efficient, there will always be opportunities that they can exploit. This may be because markets over react, moving prices away from fundamental value, because of the different investors’ objectives, or because of mandate constraints. The managers apply a flexible process to reflect market conditions, recognising that different factors drive markets at different stages. To identify compelling opportunities, they apply fundamental analysis with a strong emphasis on valuation, assessing risk versus return. These opportunities may take time to play out, and in the short to medium term the fund’s performance may differ substantially from the wider market. However, the fund is a compelling option for those with a longer-term investment horizon looking to achieve a steady stream of income with some capital growth.
The Responsible A-rated Trojan Ethical fund takes a multi-asset approach to portfolio construction, investing across equities and with some exposure to fixed income – typically high-quality sovereign bonds, particularly those offering some protection from inflation. It may also hold gold and cash. In addition, its manager, Charlotte Yonge, applies some exclusions on ethical groups, which include aerospace, defence, autos, house builders and miners. While this is an actively managed mandate, there may be periods when its allocation to the underlying asset classes remains largely static. However, there will also be times when it shifts aggressively, usually when stock markets fall and/or when valuation opportunities arise. The manager’s starting point is an analysis at an asset class level and the relative value on offer. She will then hone in on individual securities, favouring those sectors which tend to be less volatile in falling markets. This steers her to higher quality businesses that are cash generative and with more consistent revenues and away from capital intensive and cyclical companies. The resulting portfolio seeks to deliver a combination of capital accumulation and inflation protection.
For investors seeking to add a growth oriented absolute return strategy to portfolios, the A-rated Montlake DUNN WMA fund boasts a strong track record and a differentiated approach. A particularly appealing characteristic is that its returns typically exhibit minimal correlation to those from mainstream asset classes. This is because its investment strategy aims to benefit from both upward and downward sustained trends in financial and commodity markets. This approach has proved successful not only in protecting investors’ capital from downtrends in financial markets, but also profiting from them, setting it apart from many of its peers. In addition, with on average 40% of its investments in commodity markets (again, capturing both uptrends and downtrends) it provides additional diversification benefits. While sudden and steep reversals in established trends can prove challenging for the fund, its managers have enhanced the strategy aiming to mitigate their impact. Nevertheless, the fund’s returns can be volatile and the magnitude of drawdowns may exceed the risk tolerance of some investors making it better suited for those with a long-term investment horizon.
The CCLA Better World Global Equity fund, which holds a Square Mile Responsible Positive Prospect rating. This strategy favours high-quality businesses that can consistently generate returns above their cost of capital, with valuations that are attractive on a long-term basis. An additional appeal for those wishing to do good with their money while making a financial return is the fund’s avoidance of companies with uncompensated ESG risks, prioritising those that are committed to sustainability. Its managers aim to identify businesses that meet stringent criteria for cash flow, competitive advantage and ESG practices. They invest in firms that are undervalued relative to their intrinsic worth, considering both financial and sustainability metrics. Investee companies must exhibit a durable competitive advantage, should be positioned to benefit from multiple sources of growth, have management teams that have a record of successful capital allocation and shareholder value creation and which benefit from excellent governance. The resulting portfolio combines capital growth potential with a well-articulated objective to produce better outcomes in the world.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The writer’s views are their own and do not constitute financial advice. This information should not be relied upon by retail clients or investment professionals. Reference to any particular investment does not constitute a recommendation to buy or sell the investment.
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