J. Dale Harvey, founder and chief investment officer at Poplar Forest, manages a fund that's beating the S & P 500 this year. Too bad he doesn't follow the broad market index. Harvey has led the Poplar Forest Partners Fund (PFPFX) since it was established on Dec. 31, 2009 with a "contrarian" mindset. It's always been focused on going against the grain – a tactic that has paid off as the market trades once-almighty growth sectors like Big Tech for run-of-the-mill value names. "We are benchmark-agnostic, so we don't build our portfolio necessarily to try to beat the S & P 500," Harvey said of the fund, which has a gross expense ratio of 1.31% for its A shares. "We just focus on investments where we think we can generate positive long-term returns." Rather than focusing on beating the benchmark index, Harvey said he's centered on providing returns to investors. "People can get sucked into the sort of the relative game, which which we don't play," he said. "You can't buy groceries with relative performance, right?" 'Defensively postured' The fund has climbed more than 3% in 2022. That's beating the S & P 500, which has lost 16% over the same period. The fund took a dip with the rest of the market in September before marching back up in the following weeks. Harvey typically looks for stocks that seem undervalued based on their earnings power and free cash flow. He searches for names with short-term headwinds that may prompt some investors to sell and drive down the price for a period of time. Meanwhile, Harvey and his team do their research to see if there's a "brighter future" ahead for these stocks. He'll assess earnings and free cash flow on a risk-adjusted basis in search of stocks that can provide double-digit returns in the long run. "We are first and foremost bottom-up investors," he said. "We kind of follow our nose to where we see opportunities." He called Chevron a case study, as the share value "cratered" during Covid when the view was that oil companies would not recover in the short term. The oil giant is the fund's biggest holding of its 29 stocks, weighing in at 5%. But Harvey saw the volume of capital spending and felt confident there would be a rebound with energy, which makes up about 8.5% of the fund's total holdings. The sector of the S & P 500 is the only winner this year, up about 70%. Meanwhile, he exited life insurance provider Lincoln National and biopharmaceutical company Organon this year to shore up risk as concerns mounted over interest rate hikes from the Federal Reserve. In a note to investors, he said insurance companies, particularly providers of variable annuities, would be especially sensitive to equity market moves. Variable annuities give savers a tax-advantaged way to invest, and they can offer a stream of income in retirement. Meanwhile, Organon was a concern because of its exposure to foreign markets as the U.S. dollar surged and hurt the foreign bottom lines of multinational companies, he said. Morningstar analyst Todd Trubey said the fund's compact nature and focus on deep value investments mean it will typically move differently than indexes do. That long-term nature can "test the patience" of some investors, but he said it is considered a well-managed fund cut from the cloth of "outstanding, highly contrarian managers who are willing to deviate from the market." Trubey described its performance this year as winning on both sectors are stocks. The fund's heavy weighting in energy, as well as strong picks within struggling sectors, helped it thrive in 2022, Trubey said. On the latter point, he pointed to IBM as an example of a holding that has gained value this year even as the larger tech sector suffers. "In order to outperform by that magnitude, and to put up a positive number, when we're really for all intents and purposes in a bear market, you're going to have to be pretty extreme," Trubey said. "And you're also going to have to have some skill. And you're also going to have to have some luck." But Trubey warned that just because the fund is outperforming this year does not mean it always has or will. He pointed to 2017 through 2020, when the fund was largely considered "out of favor" as growth stocks took center stage, as an example of how performance and perception can shift over time. 'Compensated to wait' The start of the 2010s seems like the good time to start investing, in hindsight, for obvious reasons. The end of the recession gave way to a decade of strength within the stock market as growth stocks became in vogue. But at the time, Harvey was thinking about what moves to make as Poplar Forest was in its earliest years. Harvey founded Poplar Forest Capital in 2007 after 16 years with The Capital Group Companies, where he managed about $20 billion in assets. He felt he could do more with a smaller asset base because it gave more flexibility to invest in a broader range of stocks. It's also just a reflection of how he manages his own money: About 90% of Harvey's assets are in Poplar Forest's funds, he said. "There's a high degree of alignment between me, who manages the fund, and the returns I get," he said. "I think that gives clients some comfort at the end of the day." But Harvey, who, in his words – "zigs" when others "zag" – wasn't even doing what was popular in 2020. He noted value stocks, where he mainly looks, were "in the doghouse" for much of the 2010s as technology and other growth stocks drove the market. Now, in another period of economic downturns, he's not balking on the contrarian view. Harvey does see stocks getting battered as the Fed continues to raise interest rates and investors grow increasingly jittery about a potential recession. But while he said short-term investors will be selling off, he'll be looking for the stocks that will see an upside after a potential recession has passed. Dividends will also be a green flag for him as they signal he will continue to get some type of return while he holds a stock. "The focus really is on situations where we feel like the stock already reflects the recessionary conditions," Harvey said. "We're getting getting compensated to wait," he said of stocks with dividends, "and think there's a big prize as we get onto the other side of recession worries that people have today."