Amie Baker (left), Chris Hestelow and Anne Clare

Being a contrarian investor might seem like a distinctive investment position to take, but for advisers it can be a crucial part of portfolio diversification.

A believer in the philosophy, Allan Gray investment specialist Chris Hestelow says that contrarian investors will inevitably go through periods of underperformance, and often this will happen at times when more popular assets are doing well.

But at the same time, he adds, following the common “wisdom of the crowd” in the investment markets can be “quite dangerous” and lead to adverse impacts.

If investors follow trends and focus on buying popular stocks, securities or companies, this creates a situation in which the optimism drives these securities up very quickly and can make them overpriced.

“At its worst, it can create these big market bubbles when things become very overpriced and, of course, that creates a greater risk of permanently impairing shareholder capital,” Hestelow says.

According to the fund manager, whose analysts are tasked to seek out value “wherever possible”, there currently is a big valuation dispersion in the market.

Hestelow says that on a sectoral basis, information technology and healthcare in Australia looked very expensive, when – for example – the energy and material sectors trade at discounts to the broader markets.

“What we are trying to do is not to overpay for assets, [because] when you pay too much for an asset then you really need everything to go right and more to outperform and make good returns for your clients,” Hestelow says.

“[But] where there is more pessimism around the particular company, you just need that company to do better than a broader market expects. We are looking for those companies that trade at a very significant discount to what we perceive their intrinsic value to be.”