Perspectives on contrarianism

CIO Insights 1Q2025

Symbolically marked by the onset of the Covid pandemic five years ago and the start of the war in the Ukraine two years hence, corporate priorities in the 2020s have changed rather profoundly. Before then, for much of the previous two decades company managers were free to focus on expansion—assured by central banks that came to the rescue whenever there was a macroeconomic bump in the road. The name of the game was to capture market opportunities and grow revenues. Attention has since switched to responding to multiple external challenges, which include political upheaval in leading nations as well as major discord in international trade relations. Some observers are tempted to declare “turning points” or even a “new world order.” Consequently, managers are now mostly preoccupied with rethinking their firms’ product lineup, rearranging and protecting their supply chain, controlling their costs and strengthening their balance sheet. Recent erratic price moves in stocks may finally be an indication that investors are catching up with the notion that many companies are first and foremost in problem solving mode.

What we want to illustrate here is that price momentum is a stock market phenomenon which is not reflective of the operating reality encountered by the firms on the ground. Any thoughtful business leader knows that trends eventually break, patterns change, stories unravel, and consensus errs. We believe that such dynamics favor contrarianism over conventionalism in active equity management. Deep value investing is an inherently contrarian strategy because it is skeptical about uninterrupted growth and instead takes discontinuity as a given. As such, this “new” reality is not new to us, it is our normal modus operandi. But what exactly does contrarianism entail for us?

Above all, contrarianism does not mean going against the tide by brute force. It rather allows room for, and encourages, the development of divergent views with respect to idea generation, analysis and decision making. Critically, it encompasses all thought and operating processes that are part of the day-to-day management of the portfolio.

First, for us contrarianism in a broader context entails the reliance on conservative return assumptions. We don’t want to spoil the party, but we think that most institutional and private savers have penciled in rather unrealistic expectations going forward given the multitude of macro- and microeconomic obstacles ahead. Deep value investors are a step ahead in this regard because their outlier status has taught them to set achievable goals.

Second, the virtues of diversification and rebalancing, core aspects of our portfolio management discipline, should manifest themselves especially during times when the range of probable return outcomes for individual companies widens. Equally important, the aim of diversification should not only be to spread risk: if done well it also captures incremental sources of opportunity. In contrast, either by design or by default, conventional equity strategies have become heavily concentrated in growth and momentum, and probably more so than investors commonly realize.

Third, we look for variant structural reasons for undervaluation as opposed to chasing exciting stories or themes that drive the prices of popular equities. Specifically, our so-called “pockets of value”—which consider factors of differentiation such as company size, ownership characteristics, geographic spread, divisional scope, maturity profile, investment needs, financial structure and value-chain positioning—provide us with promising markers with which we uncover bargains.

And fourth, patience nowadays also seems to be a contrarian quality when short-term return maximization has become the behavioral norm. Buying out-of-favor stocks is a strategy that will bear fruit (1) over time as well as at (2) unexpected moments in time rather than being rewarded quickly or predictably. Whether we like it or not, deferred gratification constitutes a central tenet in the realm of saving and investing.

Are we indeed at the dawn of a new world order? We don’t know, history will tell, and we are customarily cautious in jumping to such grand conclusions. But what we are convinced about is that a healthy dose of contrarianism complements any well-balanced client portfolio. Stock market momentum may have strongly worked in favor of the last one or, by some measures, even two generations of investors, but prudence tells us that we should not count on it forever.

Sincerely,

Gregor Trachsel
Chief Investment Officer SG Value Partners AG