Lessons from legends of contrarian investing

“The ultimately most profitable investment actions are by definition contrarian: You’re buying when everyone else is selling (and the price is thus low) or you’re selling when everyone else is buying (and price is high).”
    - Howard Marks (Oaktree Capital Management)

A contrarian investor buys when the herd sells and sells when the herd wants to buy.  Ideally this involves selling when prices are high and buying when prices are low.  There is a remarkably simple way to incorporate this into your portfolio.

The VanEck Vectors Australian Equal Weight ETF (ASX code: MVW) is contrarian for two reasons.

1. Weighting – Stocks are weighted equally.  The top 10 will never be 50% or more of the portfolio, unlike the S&P/ASX 200.
2. Trading strategy - One of the contributors to its outperformance is its inherent contrarian trading strategy.  Each quarter MVW rebalances its holdings so that all stocks are equally weighted.  This process involves:
    - selling stocks that have risen since the last rebalance; and
    - buying stocks that have fallen since the last rebalance. 

Herd-like stock selection can only give you herd-like performance. Most Australian investors’ portfolios are dominated by the top 10.  The top five securities of the S&P/ASX 200 account for 33.7% of that index and four of the top five are banks whose returns are highly correlated to each other.  Most clients are unaware of the excessive concentration risk in their supposedly ‘diversified’ S&P/ASX 200 portfolio. 

Almost all large cap Australian equity fund managers are benchmarked to the S&P/ASX 200 or 300 and due to fear of high tracking error are often compelled to take herd like positions.   Below are the top five positions for the S&P/ASX 200, three of the largest active managers and MVW (We have intentionally avoided naming the funds, but if you would like to know more, simply reply to this email and we will be happy to provide you with more details).

The result of being contrarian speaks for itself.

Outperformance requires unconventional thinking

Oaktree Management’s Howard Marks says, "Everything that's important in investing is counterintuitive, and everything that's obvious is wrong." He ultimately believes that "unconventional behaviour is the only road to superior investment results." In other words, superior investors are nonconformists.  

Among Australian equities, MVW does not conform.

^{IMPORTANT NOTICE:}

^{This information is issued by VanEck Investments Limited ABN 22 146 596 116 AFSL 416755 (‘VanEck’) as responsible entity of the VanEck Vectors Australian Equal Weight ETF (MVW) (‘Fund’). This is general information only and not financial advice. It is intended for use by financial services professionals only. It does not take into account any person’s individual objectives, financial situation nor needs. Before making an investment decision in relation to the Fund, you should read the PDS and with the assistance of a financial adviser and consider if it is appropriate for your circumstances. The PDS is available at www.vaneck.com.au or by calling 1300 68 3837. The Fund is subject to investment risk, including possible loss of capital invested. Past performance is not a reliable indicator of future performance. No member of the VanEck group of companies gives any guarantee or assurance as to the repayment of capital, the payment of income, the performance or any particular rate of return from the Fund.}

^{MVIS Australia Equal Weight Index (‘MVIS Index’) is the exclusive property of MV Index Solutions GmbH based in Frankfurt, Germany (‘MVIS’). MVIS makes no representation regarding the advisability of investing in the Fund. MVIS has contracted with Solactive AG to maintain and calculate the MVIS Index. Solactive uses its best efforts to ensure that the MVIS Index is calculated correctly. Irrespective of its obligations towards MVIS, Solactive has no obligation to point out errors in the MVIS Index to third parties.}