Most investors consider themselves to be contrarians, just as most people think of themselves as above-average drivers, moderate voters and sensible shoppers.
What should advisers do when clients want a contrary mutual fund? Remind them that few mutual funds dare to put the word “contrarian” in their name, and even fewer have long-term records that prove the wisdom of going against the crowd.
The Morningstar database lists seven funds with “contrarian” in their names, assuming you include the daddy of them all, the $109 billion
Fidelity Contrafund (FCNTX). All but two — Linde Hansen Contrarian Value A (LHVAX) and Janus Contrarian (JACNX) — are beating their category peers this year.
Taking a longer view, however, contrarians haven't fared well. Of the seven funds with “contrarian” in their names, six have five-year records, and just three —
Columbia Contrarian Core (SMGIX), Meridian Contrarian Legacy (MVALX) and Fidelity Contrafund — rank above-average in their category. Your odds of picking a winning contrarian fund five years ago was 50-50.
Making matters worse, the two contrarian funds that have fared well this year —
Virtus Contrarian A (FMIVX) and Hodges Pure Contrarian (HDPCX) have fared exceptionally well. The Virtus offering is up 15.63% this year, while Hodges is up 40.66%. Both have been wretched performers the past five years, however, falling into the bottom 20% of their peers.
Why the poor showing among contrarian funds generally? In the first place, being a contrarian involves a lot more than simply buying what other people are selling. A real contrarian tries to look for inflection points of maximum pessimism about a particular stock or industry.
And that's easier said than done. Some of the most beaten-up members of the Standard & Poor's 500 stock index were American International Group (
AIG), down 99.5%, Fifth Third Bancorp (FITB), down 95.8%, and Huntington Bancshares (HBAN), down 93.5%. All three are up more than 900% since the
bear market bottom of March 9, 2009.
At the time, most investors were treating financial services stocks like rabid cobras, and with good reason: The financial system was teetering on the edge of collapse. Even if you were particularly clever and decided to invest in financials, you could have chosen Cascade Bancorp (CACB), down 38% from the market low, or, even worse,
Freddie Mac or
Fannie Mae, now buried somewhere in the third circle of stock trading hell.
“Being contrarian for the sake of being contrarian doesn't necessarily help you,” said Adam Strauss, manager of the Appleseed fund (APPLX). “You could have bought Lehman Brothers stock after it was down 90% and lost 100% of your money.”
The two contrarian funds with the best long-term records are Columbia Contrarian Core and Fidelity Contrafund. Columbia's offering has been run by Guy Pope the past 11 years, and he's averaged a 10.15% average annual gain during his tenure. He's up 6.37% so far this year, slightly behind the S&P 500's 7.21% gain. The fund is overweight in financial services, healthcare and communications services, and holds about 4% cash. A full 88% of the portfolio is in U.S. stock.
Fidelity Contrafund is up an average annual 8.72% the past decade, vs. an average 7.67% a year for the S&P 500. The fund is up just 2.91% this year, held back by its overweights in financial services and technology. It's got less than 2% of its assets in cash.
The problem with both funds is that neither are exactly undiscovered. In the large-cap universe, however, size is not as much an impediment: There's plenty of Facebook (FB) and General Electric (GE) for everyone. (Contrafund has a 52,406,084 shares of Facebook, which makes it the largest mutual fund shareholder of the stock, according to Morningstar. But Contrafund's stake is just 1.83% of the social network's shares outstanding.)
What's the best bet for a client who wants to be contrary? In today's current market environment, just being bullish seems fairly contrary. And, at least at the moment, the larger contrarian funds seem to have the most going for them.
