The idea of opportunistic contrarian investing is appealing to many investors, yet in practice it has proven very challenging to implement successfully; even those who identify good opportunities can struggle with timely approvals, sizing of trades and forced exits at the worst possible times. We think deep value is best approached by pairing discretionary expertise with a quantitative framework that allows for broad screening of global opportunities and a rigorous approach to risk management. Implementing such a strategy may allow investors to successfully incorporate that elusive opportunistic element into their portfolios.
This article defines “deep value” opportunities as ones in which valuation spreads are particularly wide relative to history, and discuss their causes, challenges and potential returns. We find:
Many investors would like to add an opportunistic contrarian component to their portfolios, but face challenges in doing so. Pre-allocating to a dedicated “deep value” strategy which incorporates discretionary oversight in a systematic framework may be one solution that helps harness the profits from opportunistic trading in a way that diversifies existing portfolios.