The trick to contrarian investing is to have a firm, unshakeable belief in the unchangeable nature of the human psyche.

As the global economy struggles to find growth, investors scour markets for yield and valuations in some sectors balloon out, those who swim against the tide and look for opportunities in unloved places have an edge in a world overloaded with information.

To download the PDF of this article please click here:Allan Gray InFocus Report

At least, this is the view of contrarian investors Allan Gray Australia (AGA), whose Equity Fund looks for oversold stocks in industries that are uncomfortably out of favour.

“If you’re willing to fish in the contrarian pool, you face less competition and that’s an advantage” says Julian Morrison, National Key Account Manager at Allan Gray. Morrison spoke to Professional Planner as part of its Infocus content series.

“That allows you to get into a position to have the strongest bargaining power and buy stocks at a steep, steep discount.

“But of course, there’s a reason why there’s no competition there, so the trick to pulling those investments off, is to have a level of patience uncommon in today’s world,” he says.

Negative news is the firm’s currency, and while they never take a contrarian position to the broader market without cause, the team has spent years watching market participants overreact severely to negative news.

“When the news is very positive, people tend to get overly enthusiastic and are willing to pay too high a price for a stock,” says Morrison, pointing out that the firm steers clear of that.

“But if you have a situation where a stock is priced for a dreadful outcome, and it ends up being less bad than expected, that can be a great thing for us.”

The determination to scoop up investments as they languish in uncomfortable times, be it a plunging oil price or an out-of-favour blue chip, gives contrarian investors opportunity to put into practice that most difficult of investor behaviours, patience.

Benefiting from passive’s popularity

Short term-ism has plagued active managers for decades. Contending with clients who demand immediate returns or are uncomfortable with waiting for a stock turnaround, active managers are often left hugging the index.

This short-termism is compounded by the rise of passive investing, a phenomenon spurred on by a long bull market. In recent years, trillions of dollars have poured into passive investment products, with demand for systematic and easily-replicated strategies offering low-fees and predictable performance.

Courtesy of the bull market, active managers have found it difficult to compete with these low-cost offerings, as they track the steadily rising index and provide their owners solid returns.