The Art of Contrarian Investing: Positioning For The Future

Dan Bristow: Where are you finding investment opportunities today? So how does the portfolio positioning look from a regional and sector basis?

Zahid Kassam: Yeah, and I'll break it into a couple pieces because I feel like we've been through two very distinct periods. And in a very short recent time period, tariffs are very topical right now, and market volatility has been high and as you'd expect, turnover steps up for us during big times of market volatility. And Liberation Day was definitely no different. And so we're leaning in as the risk rewards get better. We're always high grading the portfolio, optimizing risk reward in the portfolio. And so yeah, we've been leaning in as securities that we like just get cheaper and we're digging in. Tariff exposures are different for different companies, even within sector, one auto supplier versus another auto supplier. We're digging in to say, "Which one can handle a potential adverse outcome on tariffs better than another one who maybe can't."

So we're doing that work. We're finding opportunities in high ROIC cyclicals a little bit in deeper value companies as well, where it feels like a recession is already priced in. But then if I were to zoom out, 2024 was one of the biggest momentum markets of all time really. And naturally we shy away from that, we lean away from that. And so the opportunities that are left for us, a big overweight in Europe, you'll see a little bit in Japan as well. But if you just go into Europe and contrast it with the US, and the US, not as much margin of safety when we dig in. A lot of companies that are closer to peak multiples on what we'd say, peak earnings, peak profit margins versus history, that type of thing.

In Europe, on the other hand, I mean, we get their bottoms up. But even if we think about the European backdrop overall, I mean, not a lot has to go right, valuation differentials. Europe versus the US are multi-decade extremes. And so if you get peace in Russia and Ukraine, if you get lower energy prices, fiscal stimulus, lower interest rates, not a lot has to go right in Europe and it feels like there's more room for things to go right. And so I think that also lends itself to seeing why positioning is the way that it is. But again, I'd come back to moments of crisis, picking up on those higher ROIC cyclicals, a little bit of the deeper value opportunities. And so that's why the portfolios look, the way they look today.

Dan Bristow: And how do you expect this type of strategy to behave in different market environments? Do you think that it's only really going to add alpha in strong value driven markets?

Zahid Kassam: I'll start with the other side of it. Narrow momentum markets are generally not a contrarian's thing, and I'd say we're no different to that. And so those markets are tougher for us. Coming out of crisis, I think returns tend to shine. We lean in as the crisis is happening because that's what the risk rewards tell us to do, and that's what our work leads us to do. And then the crisis passes, the market starts looking forward and better times come. So I'd say that's one piece of it. But it's not just that when value rips that we do really well. We've chunked historical performance up looking at value markets where value does better than growth and growth markets, vice versa.

And I think because we have the three different areas of opportunity, the deep value opportunities, the restructurings, the distrusted growth, the compounders with the controversy, I think it enables some idiosyncratic opportunity and ability to perform in different types of market cycles as well. So it's not just to say that we'll do well in value because it's a contrarian strategy. I think there's a little bit more going on than that. So hard to give you just a fixed answer and there are no guarantees. But I'd say that's been the historical experience.

 

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