This value fund uses 'contrarian' plays to outperform its peers. Here's what it's betting on now

Published Sun, Jan 9 20228:38 AM EST

Jesse Pound @/in/jesse-pound @jesserpound

Sometimes the best way to beat the market is to zig when everyone else wants to zag, according to the manager of a five-star mutual fund. Kari Montanus, a portfolio manager for the Columbia Select Mid Cap Value Fund , just wrapped up a third straight solid year for her fund. The fund focuses on what Montanus calls "contrarian plays," and she built a dashboard of data and valuation metrics to help her find stocks who are too cheap to pass up. "We want to focus on the stocks that are cheap, whether it's on an absolute basis or relative to their peers or relative to their history," she said. The fund's institutional shares rose more than 32% in 2021, beating the S & P 500 and the Morningstar mid-cap value category. This marked the third straight year the fund was in the top quartile for Morningstar category. The performance was boosted by a strong finish, as it rose more than 11% in the fourth quarter, putting it in the top 1% of all funds in its category during that three month stretch. Another part of finding contrarian stocks is not being afraid of those with negative price momentum, Montanus said, even if it means it takes a while for those picks to start working. "It's a big part of our philosophy, just knowing that we cannot time the market perfectly and we cannot time these stocks perfectly. So for our buy decisions we want to be early … by the time the market recognizes it, usually you've missed a lot of the upside," Montanus said. The fund's top holding is Devon Energy , a shale company whose stock nearly tripled in price in 2021. One factor in the recent rise in oil prices is that U.S. producers have been hesitant to invest internally after being overextended in the last oil cycle. That discipline should help the traditional energy companies remain solid stocks even as parts of the economy shift toward cleaner energy sources, Montanus said. "Fossil fuels still supply a big, big chunk of the world's energy needs, so companies like Devon that are really focusing on free cash flow and returns instead of just growth should continue to benefit," Montanus said. Though Devon is the biggest single stock in the fund, energy stocks made up 5.5% of the portfolio at the end of November, which is only slightly ahead of the sector's weighting in the firm's benchmark. Montanus said that she is careful not to make big bets on individual sectors or factors. Another play tied to the economic recovery is Hyatt , which made up just under 2% of the portfolio at the end of November. Montanus said that she bought the stock in the spring of 2020 'We felt that investors were not giving the company credit for a strategy that they had outlined to really move to more of an asset-light, fee-based model like peers Marriott and Hilton," Montanus said. "Both of these stocks had re-rated significantly because of the transformation that they had gone through several years before, and Hyatt was just kind of behind but on the same path." Hyatt was one of the stocks that powered the fund's big fourth quarter, as its shares jumped 24%. Montanus spoke to CNBC in late December, as the omicron variant was spreading rapidly around the U.S. Despite this latest uncertainty from the pandemic, Montanus said it was important to not make major changes to a portfolio or philosophy. "The delta variant and now the omicron variant have been throwing wrenches in the economic recovery and in the market, but this is the exact kind of environment where having a proven investment process that you stick to makes a huge difference," she said.

A pump jack operates at a well site leased by Devon Energy Production Co. near Guthrie, Oklahoma.

Nick Oxford | Reuters

Sometimes the best way to beat the market is to zig when everyone else wants to zag, according to the manager of a five-star mutual fund.