There is no ideal way to select the best shares. Certain investment methods become popular, only to fall out again. So, when it comes to selecting an investment stock, the smart way is to hold a mixture of stocks run by savvy managers with varying investment philosophies.
For one, it is difficult not to be swayed by previous performance. Growth investing has thrived since the global financial crises of 2008, while those managers who apply a contrarian, value-driven technique have experienced a period of poor performance, even though they usually have excellent long-term records.
There is significant evidence that the tide is turning back to favour the value investment approach again, so being exposed to shares managed in this way could bring great rewards.
There are quite a few trusts that are managed by real contrarian managers. Staking your investments in out-of-fashion brands and sectors that are unpopular with the rest of the market is a hard decision, and investment managers -including investors- must be ready to control their urge.
However, those stocks that are regularly mentioned as being in the contrarian class by investment experts at brokers like Numis, Canaccord Genuity and Winterflood are distributed across various sectors.
Under the global growth sector, Scottish Investment Trusts (SCIN) and British Empire (BTEM) are listed, while in the UK equity income sector, Temple Bar (TMPL) and Lowland (LWI) are mentioned.
Aberforth Smaller Companies (ASL) is categorised in the UK smaller companies sector, while Fidelity Special Values (FSV) is listed in the UK all companies sector. These companies present promising stocks with good outcome if their current performance is anything to go by.
Investors wishing to play in global fields can study the actions of notable investment companies and their managers. The Scottish Investment Trust embraced an overtly contrarian approach to distinguish itself from other global growth trusts. This came after the appointment of its new investment managers Sarah Monaco and Alasdair McKinnon in 2015.
Both managers argued that it was against the best interests of their investors to follow a herd mentality, and hence adopted a contrary stance in the bid to make profits. Their position is that markets tend to concentrate a lot on the previous performance of companies and industries. Because of this, most investors tend to overvalue fashionable companies, leaving the unfashionable ones undervalued.
They have cited some of these unfashionable companies as “ugly ducklings”. Because of their previous uninspiring performance, many investors shun them. However, according to contrarian investors, they can spring a surprise at any time.
In addition, such companies have a dividend yield that is higher than average, thus providing attractive earnings in the short-term. A typical example of a company with such stocks is Marks & Spencer. It provides rewarding income and has the potential to impress in the future.
Focusing to the UK for income
The UK equity trust Lowland (LWI) is among the 3 investment trusts run by James Henderson, who has been classified by research analyst Emma Birds, as being a contrarian investor.
Following James Henderson’s position on investment, we would be looking to invest in promising small and medium stocks as opposed to FTSE 100 (UKX) stocks. This year, Lowland’s dividend was increased for the 7th consecutive year, except in 2009 due to the global financial crisis. The company has recorded significant pay-outs since 1975.
Another UK equity income trust with a long-term record of compounding income is Temple Bar (TMPL). For 33 years, the company has recorded a steady dividend growth.
Watching global investment icons like Warren Buffet is another way to select profitable shares. This year his investment company, Berkshire Hathaway added shares to its stakes in Apple, Synchrony Financial and General Motors.