Is it worth being contrarian in today's markets?

Let's start with the big picture. Where are we in the cycle?

Traditionally, what we see is that after interest rates have peaked, that's a great time to be involved in lower volatility strategies, and some of the high volatility strategies tend to have a tougher time just after rate cycles peak. The jury's still out on that one, of course, but there's certainly been some market expectations that rates could come down. That's one side.

The other side that I think probably gets missed quite a bit by people too is around styles of investing. There's a cycle in those as well. When I reflect on my career and my history and things I've seen, there have obviously been some pretty big cycles around value and growth. 

In the 2000 dot-com period, we saw growth had amazing returns and value managers were having a terrible time and were shutting their doors from persistent underperformance. We got a GFC-type event and we saw other styles have really good runs after that period.

Once again, after the GFC, when we got very close to zero with low interest rates globally, that was an impetus for growth to really do well. And we saw a prolonged period of growth doing well from, really, 2008 through to about 2020. It was a very long period where growth outperformed value.

And then equally with something like low volatility versus high volatility, we look back over 80 years and we see that there's strong returns to low volatility over high volatility, and yet we go through these prolonged periods where one will outperform for quite a while and then the other will, and we rotate back and forth between those. 

Just to give you the context on the low volatility one: Low volatility, really post-GFC, was a beneficiary of that. So, from 2008 through to basically about mid-2016, low volatility strategies globally did pretty well. And then from 2016, they've had a much tougher time where we've seen quite a few bouts of high volatility stocks outperforming.

So, there are a couple of other cycles just to think about there. When you're thinking about long-term investing, [it's important to] position yourself for those long-term trends. 

We've seen investors rotate away from defensives into higher beta, lower profitability and higher-growth stocks. Is that momentum sustainable in your view?

There are certainly some pockets of the market that we look at and think that they're a little bit speculative at the moment. But equally, there are some parts, like AI, which is the big theme that everyone's talking about and it's fascinating. There are real economic fundamentals behind that and it is genuinely improving the prospects for many businesses. So, you do have to sort the wheat from the chaff and focus on the ones that have got the fundamentals versus the ones that don't. And then you can make more informed decisions.

Speaking of AI, we've definitely seen a lot of investors crowd into those AI beneficiaries. Is there any danger in following the herd?

For us, the lens we'd always approach is to understand that there's sentiment in the market, understand there's momentum, things happening, and there are particular pockets of the market that are very loved and have these momentum characteristics, but look at it through the lens of valuation, look at through the lens of quality as well. And then you can get a much better picture as to how justified that price momentum actually is.

How much value are you seeing in the market today? 

And then, if we actually think about another style that has been doing really well, it's been the quiet achiever over the last few years, and that's quality. These are businesses that have very good operating returns, they've got good structures around their debt, and they've got good metrics financially, but also they've got other financial elements around quality that are important as well. Those businesses have been doing well over the last couple of years, and I think in a forward-looking environment, they should continue to do well because they're just more robust businesses and they can handle disruption more easily than some other businesses.