Great rewards of contrarianism

One of the late Sir John Templeton's key investment tenets was the value of contrarian investing.

It was Sir John who was credited with saying: “To buy when others are despondently selling and to sell when others are greedily buying requires the greatest fortitude and pays the greatest reward”.

This year’s trends in new product launches show that his wisdom seems to have been lost on the fund industry. Time and again the fund business seems to lack the necessary fortitude to think beyond the short-term profits won by playing into the hands of a public willing to buy the latest hot fund.

The US fund industry, which is all too often focused on what will sell and not what will perform well over the long term, is stuck in a product pushing mode. When one product is selling well, the fund industry has historically played follow the leader.

The problem with this “me-too” approach is that by the time the product is developed and brought to market, investors typically have the opportunity to buy just as it starts to falter.

Some learned that lesson painfully in the late ’90s when tech and internet funds were the latest fad. Firms like Merrill Lynch and Munder Capital churned out a succession of tech and internet funds. Lured by what seemed to be a sure-fire way to post double and even triple-digit returns, the run up in the funds encouraged a string of small entrepreneurs to launch their own internet and tech funds. Most of those funds went south – along with investors’ money – when the tech bubble burst.

Ryan Jacob became the poster child for the tech boom and bust. From 1997 to 1999 he managed the Kinetics Internet fund to an eye-popping 232 per cent gain. He then launched the eponymous Jacob Internet Fund, which then proceeded to post a one-year loss of 79 per cent.

Remarkably, the lesson of the tech wreck was lost on a good number of fund groups that started churning out principal protected funds. The funds peaked in popularity in 2002 and 2003 when firms churned them out en masse. The funds’ promise to guard investors’ principal investment was enticing in the earlier part of the decade. But in to provide the guarantee—which was typically backed by an insurer—the funds were forced to invest so conservatively that investors would have often been better off in a certificate of deposit.

Once again uncertainty stalks the economy and the industry is still manufacturing products that fit the times and will bring money in the door. That is especially true in the exchange-traded fund space where there is a first-mover advantage to develop and launch the index-based funds. To wit: ETFs based on Bric countries are all the rage as returns in the US have dried up. The same holds true with ETFs and funds that invest in frontier markets.