Contrarian Portfolio Management
First, let’s be clear about what we’re not trying to
achieve with this portfolio. We’re not deliberately trying
to beat the market (although that would be nice), and we’re
not offering you a tipsheet for your own investment purposes.
Instead, we’re conducting a more or less scientific experiment
that will try to determine whether it’s possible to run a
contrarian portfolio by choosing whole sectors, rather than by selecting
specific stocks, the way that most traditional contrarians prefer
to do.
Contrarian Portfolio Management & MSCI
The index measures that we’ll be using will be drawn from the
36 sector-specific indices that MSCI International publishes every
day within its World index series (www.msci.com). MSCI’s
All-Countries (AC) World index currently covers 48 major and emerging
stock markets, which should give us enough of an international market
spread.
Next, we need to tackle the thorny subject of finding a base unit
for our portfolio. It’s not much good sticking with pure
index figures (far too boring), so for the sake of clarity we’ve
decided to ‘invest’ a notional US$2,000 in each
of five selected AC indices, and to track the overall ‘value’
of our investment according to how these five sub-funds perform
over time.
There will, of course, be no consideration of dividends or
transaction charges on our US$10,000 investment. And the MSCI
indices are neutral to dollar movements, so a big slide in the
dollar shouldn’t affect our calculations too much.
Contrarian Portfolio Management - Sector Selection
Now for the hard part, the sector selection. Here are our five
favourites for a contrarian portfolio:
Recovery stocks
The traditional quarry of the contrarian investor. Any traditional
industry that combines a long track record with low stock valuations
and high dividend yields should always be examined for recovery
potential.
We’ve chosen automobiles, MSCI index O/AC AUTOMOBILES
for our first US$2,000 ‘investment’.
Gain Jan 2001 to mid-March 2001: 13.07 per cent.
Loss mid-March 2000 to mid-March 2001: 7.89 per cent.
Gain mid-March 1996 to mid-March 2001: 31.20 per cent.
Contrarian Portfolio Management & Merger-Potential Stocks
Merger-potential stocks
Always a high-risk area. When a solid industry is getting
badly over-supplied and profits are being squeezed by excessive
competition, there’s always the likelihood that a global
consolidation will follow. Pharmaceuticals investors have already
made massive profits from the windfalls that mergers have brought
to their own industry. But get it wrong and you’re dead.
Our notional US$2,000 goes into the global banking industry
(MSCI: O/AC BANKING), which is just starting the consolidation
process now.
Loss Jan 2001 to mid-March 2001: 5.05 per cent.
Gain mid-March 2000 to mid-March 2001: 8.10 per cent.
Gain mid-March 1996 to mid-March 2001: 22.35 per cent.
Contrarian Portfolio Management & Cyclical Stocks
Cyclical stocks
Not strictly a contrarian idea, but a matter of picking a neglected
sector and running with it until it peaks. We’ve chosen
non-ferrous metals (excluding gold), which are coming up from
the bottom as copper demand increases. MSCI’s O/AC METALS
- NON FERROUS index gets our third US$2,000.
Gain Jan 2000 to mid-March 2001: 13.07 per cent .
Gain mid-March 2001 to mid-March 2001: 14.77 per cent.
Loss mid-March 1996 to mid-March 2001: 3.49 per cent.
Contrarian Portfolio Management & Consumer Stocks
Consumer stocks
Some consumer stocks defy the normal market rules of behaviour
for reasons that are totally non-financial. As the world’s
population gets older and wealthier, and as state welfare systems
are wound down, the worldwide healthcare sector has been displaying
a fundamental negative-covariant strength that is confounding
every trend in the main market. So the O/AC HEALTH & PERSONAL
CARE index gets our fourth US$2,000.
Gain Jan 2001 to mid-March 2001: 13.07 per cent.
Gain mid-March 2001 to mid-March 2001: 15.72 per cent.
Gain mid-March 1996 to mid-March 2001: 115.15 per cent.
Contrarian Portfolio Management & Transport Stocks
Transport stocks
The toughest one to call, because the global market is badly
glutted and valuations are low. But people will always need
transport, no matter what else happens. At present there’s
no viable long-distance alternative to airline travel. O/AC
TRANSPORTATION - AIRLINES is proving very resilient - and gets
our final US$2,000.
Loss Jan 2001 to mid-March 2001: 15.72 per cent.
Gain mid-March 2000 to mid-March 2001: 6.78 per cent.
Gain mid-March 1996 to mid-March 2001: 7.40 per cent.
Our (pseudo-historical) average portfolio performance
So how would our portfolio have performed if we’d bought
it five years ago? It’s an academic question, of course,
because we wouldn’t have bought the same sectors under
those different circumstances. But if we’re to have any
kind of yardstick for the future we need to get a firm grasp
on the past before we start. And here are the raw statistics:
Loss Jan 2001 to mid-March 2001: 4.47 per cent (MSCI: Loss 10.49
per cent)
Gain mid-March 2000 to mid-March 2001: 8.23 per cent. (MSCI:
Loss 19.26 per cent)
Gain mid-March 1996 to mid-March 2001: 39.09 per cent. (MSCI:
Gain 47.63 per cent)
Contrarian Portfolio Management & The Five-Sector Portfolio
At first sight it looks as though our five-sector portfolio would
have underperformed the MSCI only quite modestly over the past five
years, with a 39.09 per cent gain that compared with 47.63 per cent
from the World index. But look a little closer and you find another
story. During the wild years of the late 1990s, when techs were all
the rage, it regularly remained stuck at less than half the growth
rates of the World index 11.51 per cent in 1998, against 22.78 per
cent for the World, and 9.50 per cent, against 23.56 per cent in 1999).
It started last year badly as well, with an 11.47 per cent drop
in the first three months of 2000 that was more than twice the 4.81
per cent drop in the World index.
But just watch what happened then. By the end of the year, our
portfolio had actually achieved a slim 2.45 per cent profit, compared
to a 14.13 per cent drop globally, and in the first 15 troubled
weeks of this year its decline was markedly less severe than the
drop in the troubled MSCI. Is our argument coming through yet?
Contrarian Portfolio Management & Five Contrarian Sectors
So, finally, here’s how US$10,000 invested in our five contrarian
sectors in January 2001 would have looked in mid-March. Our automobile
and metals sectors, which we thought were the riskiest, have in fact
recovered somewhat while our healthcare and airlines took a late tumble.
But on the whole the defensive character of our position seems to
have served us well enough so far. Next month we’ll be
in a better position to see how our selections shape up in the light
of the mid-March shakedown, which was happening as we went to press.
We’ll also be looking at the many strategies contrarian investors
use to identify their targets. Just as well, perhaps. It’s
going to be a bumpy year.
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