Recently, CNBC ran a piece that I found very interesting on Contrarian strategies: http://www.cnbc.com/2016/12/28/contra-funds-arent-always-contrarian.html
It focused on the fact that many funds labeled ‘Contrarian’ really don’t achieve their namesake’s outcome. In fact, in that article, they pointed to many being highly correlated to the S&P 500 Index. One of the main reasons is that the contrarian managers own the same names as their non-‘contra’ counterparts. Initially, the goals of these funds would be to buy things that everyone else was selling; in other words, to buy the beaten down names and sectors.
To put it bluntly, one would expect a contrarian strategy to be non-correlated or at least have low correlation to the broader markets.
Advisors reviewing a prospective client’s holdings can add value by illustrating how investments may move in lock-step with one another. Unfortunately, some investors might think “contrarian” funds gain in value when the market sells off. We know that when markets come under intense pressure, most holdings suffer. Contrarian investing doesn’t put hard floors and hedges in portfolios. Much like target date funds caused some surprising results in 2008, many strategies only provide protection thru diversification, at best.
Instead advisors would do be helping their clients by finding strategies that offer lower correlations between one another. Better yet, strategies that do offer real hedging.