Market volatility could lead to opportunity for patient investors, according to a fund manager specialising in contrarian strategies.
Although the market had long been fixated on stability and “comfortable” investments, generally those stocks were overpriced so did not represent good investment value, Ariel Investments chief investment officer for international and global equities Rupal Bhansali said.
“On the other hand, people are shunning volatility like the plague,” Bhansali said.
“And when something is hated that much, it can be a source of opportunity in the way that we think.”
She described contrarian investing as waiting until stocks go “on sale” in order to purchase high-quality stocks at a reduced price.
“It’s about waiting for things to come your way, waiting for that sale, [but ] we do not invest in what I’d call distressed values,” she said.
“We buy on sale, we’re not interested in buying on clearance.
“But we do believe that for classic merchandise, if you’re patient, you’ll get it at a better price point.”
She said the industry had become obsessed with stability at the expense of volatility in the hope that investors would achieve low returns with low risk.
However, she said by shunning volatility they were also missing out on opportunity and often overpaying for stocks, as certain market segments had become overvalued.
“Whenever there is an overvaluation, you run the risk of losing money,” she said.
“And we certainly think in certain portions of the equities market, because there’s a fetish for stability, you risk actually having volatility and not stability.
“So the dream of stability can become the nightmare of volatility.”
Instead, investors should focus on valuations, which was the tipping point between risk and reward, rather than perceived stability and volatility, she said.
“Many investors think stability is equated with reducing risk, but in reality they may have merely swapped risk, not reduced it,” she said.
“Overpaying for stability can result in underperformance or losses.
“On the other hand, going long on volatility at a discount can work in your favour for generating returns.”