Lukas Strobl: Every once in a while, analysts at Morningstar identify a few contrarian fund picks. Those are unloved strategies that may well offer hidden potential. Mathieu Caquineau is here with us today. He has three of those for us.
But first, Mathieu, when you identify a contrarian fund pick, what do you look for in a strategy?
Mathieu Caquineau: Yeah, I’ll just start by saying that, unfortunately, a lot of investors are still focused on short-term performance, and they tend to sell their fund with the worst timing. And we at Morningstar, we always prefer to take the long-term view. This is really rooted in our research and the way we build our ratings. And there might be good reasons why a fund is underperforming. Maybe the investing style is currently out of favor. Maybe the fund manager has made decisions that are costly right now but will pay off later. And you have to remember with good active management, it’s often more winning than losing. And perhaps your fund is just going through a losing phase and that’s okay. So, what matters most and what we look for is a fund with the same investment team and the process that’s been applied consistently.
Strobl: All right, let’s take it away. What are your three picks?
Caquineau: Yeah, my first idea, Lukas, is Veritas Asian Fund. That’s an Asian equity fund. Obviously, the fund has been in a tough spot. It underperformed last year. It’s underperforming this year. Investors are starting to pull money out of it. And the reason for that is the fund is really focused on quality growth stocks, and value and dividend stocks outperformed last year. And this year, the manager has increased his exposure to China. Unfortunately, China has been one of the worst places to be in emerging markets. But this remains a great strategy in our view. The fund manager Ezra Sun has been running this for almost 20 years. He’s relying on a small but stable team. He has developed a robust approach where deep fundamental research is driving the stock selection. And even with short-term difficulty, that’s still a fund that’s outperforming more than 90% of its peers over the last 10 years. That’s a fund we remain highly convinced of. It’s earning top marks on people and process.
Another fund I wanted to highlight today is Fidelity Special Situations in the U.K. equity space. Again, investors are selling this fund this year. I mean, it’s underperforming, so that’s understandable. The reason for that is its small cap exposure has hurt. But if you look back at the fundamentals, this is still an outstanding fund. The manager, Alex Wright, is a skilled investor. He has followed this contrarian value approach for a number of years. Since 2012 on this fund, he has delivered strong returns. Again, that’s a fund that’s earning top marks on people and process.
The last one I wanted to talk about today is taking us to Japan with JPM Japan Equity. Again, a fund that’s really struggling since 2021. And you can see that also from the flows. I mean, investors are taking their money out of this fund. Perhaps they’re giving up on this one. We think that’s not a good decision. We still see a lot of merits in here. The lead manager, Nicholas Weindling, is one of our favorite managers in Japan Equity. He’s been running this for a long time since 27, with great results, with the same investment approach. And that’s a fund that gets a top mark on people and an above average rating on process. So, that’s another fund that we don’t think investors should sell, Lukas.
Strobl: As always, you’ll find links to these strategies in the transcript below. Mathieu, thank you for these picks today. For Morningstar, I’m Lukas Strobl.
