The Investors’ Chronicle’s Contrarian Value screen, which has posted a 9.7 per cent average annual total return in the 12 years it has been live (versus 6.3 per cent from the FTSE All-Share), adopts an anti-herd approach.
To do this, the screen first looks for companies with semi-decent operating records, manageable balance sheets and the potential for earnings growth, before highlighting those trading in deep value territory.
It is triply contrarian. For a start, by looking for extremely cheap shares, it is going against prevailing sentiment; if a stock were trading in line with the rest of the market, it wouldn’t be cheap. In this sense, the screen is banking on mean reversion. This is the idea that stock valuations and company fortunes can only stay depressed relative to their historic average for so long. At a certain point, the logic goes, buyers will return.