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Contra funds aren't always contrarian

Just because a fund calls itself "contrarian" doesn't mean it's offering something all that different.

A contrarian strategy buys stocks when they are unpopular and sells when they come back in style. The funds themselves say they seek out stocks that have "fallen out of favor because of short-term, transitory factors," or are "underfollowed, underappreciated and undervalued."

It may come as a surprise, then, that if you invested $100 in the $10 billion Columbia Contrarian Core Fund, you'd be buying almost $4 in Apple stock, $3 in Microsoft stock and $1.30 in Alphabet shares. That's very close to what you'd be getting if you just bought the S&P 500 index.

Often, there is little contrarian about a fund aside from its name. Some of the biggest contrarian funds have popular holdings and daily movement highly correlated with the S&P 500. Returns this year appear to be a mixed bag, with the funds that don't rise and fall with stock indexes bringing exceptional gains even as bigger funds underperformed.

To be fair to Fidelity's Contrafund, the $107 billion megafund hasn't truly been a contrarian fund for decades. At the time that fund manager Will Danoff took over in 1990, it had a contrarian mission and only $287 million in assets, according to a Chicago Tribune article at the time.

"I don't buy what everybody is selling when everybody is selling," Danoff told the Tribune. "My shareholders don't want me to own the new lows list."

Today, the fund still seeks companies whose value "is not fully recognized by the public," but it is generally a large-cap growth fund, according to a Fidelity spokesman. There's nothing contrarian about large stakes in companies like Facebook, Berkshire Hathaway, Amazon, Alphabet, Apple and Visa.

Columbia Contrarian Core Fund, the second-biggest fund with a contrarian name tracked by FactSet, is even more highly correlated with the S&P 500 than the Contrafund. The $10 billion fund uses a process that is "contrarian but also consistent and disciplined" to screen for stocks that are "trading well off their highs but remain fundamentally strong," according to its website.

The fund is overweight in information technology, financials and health-care stocks, with about a third of its net assets in big names like Apple, Berkshire Hathaway, Citigroup, JPMorgan Chase, Alphabet, Microsoft, Comcast, Verizon, Morgan Stanley, Philip Morris International and Facebook. Unsurprisingly, it tends to track the S&P 500 very closely. A Columbia spokesman said the investment team was not available to comment.

Investors looking for a true against-the-grain manager may want to take a look at some of the smaller funds billing themselves as contrarian. Those funds exhibit lower correlations and more obviously contrarian components, like Virtus Contrarian Value Fund's investments in energy and materials stocks, which paid off later in the year. A spokesman for Virtus said the fund's managers do not speak to the media.

Even if the bigger funds wanted to make more contrarian bets, it would be hard to do so. Managing a massive fund makes it difficult to buy or sell large positions quickly without moving the market. And active managers across the board have had a harder time finding good investments that can propel them above their benchmarks.

"The past few years have been more challenging for active managers, as central banks moved interest rates to extraordinarily low levels, creating an environment with tight correlations and little disparity between winning and losing stocks," said Jeff Cathie, a spokesman for Fidelity Investments.

"A lot of guys just threw in the towel and became closet indexes." -David Nelson, Chief Strategist, Belpointe Asset Managment

David Nelson, chief strategist for Belpointe Asset Management, agreed that the low-volatility market environment driven by low interest rates has made it hard to pursue contrarian investing strategies. Active managers have been under some pressure to simply keep up by taking less aggressive positions.

"There's a lot of reasons why it became really difficult to beat the S&P 500, and the biggest reason was the Federal Reserve — they just sucked all the alpha out of the market," Nelson said, referring to performance above market indexes. "A lot of guys just threw in the towel and became closet indexes."

But interest rates are slowly rising, and contrarian funds that make real contrarian bets will become better options for investors, especially if they're willing to wait a few years for long-term investments to pan out, Nelson said.

"As long as they're not betting the ranch on any one name, I think contrarian investing is a very valid form of investing," he said. "Those managers tend to be a lot smarter, because it's a lot harder to buy at the bottom and have the confidence in the fundamental analysis to know it's going to work out."

Correction: Janus Contrarian Fund's top holdings are cash, United Continental and St. Joe Co. That fact was misstated in a table in an earlier version of this article.