Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Alasdair McKinnon, Manager of the Scottish Investment Trust.
Hello, Alasdair.
Alasdair McKinnon: Good morning, Emma.
Wall: So, you describe yourself as a contrarian investor. Now, this is one of those subjects where we are told to be more contrarian, don't get into herd mentality in investing. But it seems to many investors, I think, quite an opaque concept. What is contrarian investing mean to you?
McKinnon: Well, if I just step back a level and just look at humans as a species, and we're really hard-wired to want to be part of the crowd. Because back in more dangerous times when we didn't have this great civilization that we have today, if you weren't part of the group, if you weren't getting on with your peers, then it was very dangerous. You'd be isolated; you could be attacked; you could be hungry; you could be cold. Now, that's a very good logic and humans working together built some great things.
But in financial markets, we think this crowding instinct can work against the best interest of an investor because you don't really want to be doing the same thing as the crowd all the time. So, we really think there's a great opportunity when the crowd can get things wrong and we spend our time trying to analyse where we think the crowd has got it wrong and that's what we define as contrarian investing.
Because you get eventually popular stocks the crowd really like become overvalued, so we don't want to be involved in them and in contrast, the stocks we do want to be involved get unpopular, they get undervalued and that's where we see lots of opportunities.
Wall: So, is it as simple as being a value investor then? Are you just looking for those stocks whose metrics say that they are cheap?
McKinnon: Well, we do like value metrics; we do like cheap stocks, but we take it a slight twist in that as we don't just look at is a stock cheap optically. We spend a lot of time analyzing whether things can improve, not just saying is it cheap for the sake of being cheap. So, we want things to improve. So, we don't just buy things that are cheap necessarily but we're always looking for things to improve. But we do like cheap stocks as they are a great place to start.
Wall: And looking at this point in the market cycle, I think even last year or even better, five years ago, there were a lot of good opportunities, stocks that were undervalued by the market. But we have seen the U.K. stock market rally significantly since the credit crisis and indeed over the last year. So, is it much more difficult to be a contrarian investor in this particular environment?
McKinnon: I wouldn't say it's more difficult, no. I think it's always difficult investing. At the time, it always seems that markets always are difficult to judge what's going to happen next. But I think as a contrarian investor the great thing about it is there's always areas of the market that are out of favor and appear to be unloved and offer good opportunities.
So, there would be areas of the market we don't wish to be involved in, but there are certainly – I mean, just now, there are areas of the market we think look quite good value and even if markets fail, we think they probably wouldn't join in that general fold. So, we think there's always opportunities.
Wall: What about the stocks that you don't like then? What to you right now looks like herd mentality and you don't want to be anywhere near that?
McKinnon: Well, the areas we don't like just now are in particular a lot of the U.S. technology names, what's being described as this acronym, FANGs, Facebook, Amazon or Apple, Netflix, Google. These are the ones that people put in now.
Now, what's happened there is – they are good companies. Don't get me wrong. And they are absolutely crushing their competition such as it exists. But what's happened is, they have just become too popular. Everybody loves them and they've become huge parts of indices. There's a lot of money flowing into markets that's going into passive funds and they are buying these stocks regardless of their valuation.
Now, what we think is, whilst we think they are decent enough companies, they've done so well that they are now valuing extremely good prospects for an extended period. What we see on the horizon is actually a few headwinds, in particular, regulation has got a strong chance of becoming much stronger and there's also a cyclical – for some of the hardware names, they've done really well and people are probably getting a little bit bored of some of their products and thinking of the smartphone cycle. Everyone has got a smartphone now. Yes, we'll probably all buy another one, but maybe not as frequently as we did in the past.
If you look at what we think is undervalued just now and is potentially interesting, this is a lot of – this might make you think, gosh, that's brave, but that's the sort of approach we have to take. Oil is interesting just now; there's a lot of headline bad news at the minute; there's a concern there's too much supply from U.S. shale. But the underlying picture is, there's still growing demand for oil and we think the supply situation is actually rectifying itself quite quickly.
The other area we like generally globally is retail. It's almost the flipside to that FANG story I was talking about because whilst people have got so bullish about Amazon in particular, they've got so bearish about the prospects for real world retailers with good reason in some cases, but there are a number of really good retailers that will survive this and will prosper and are really adapting to the new world going forward. So, we think that's a very interesting and unloved area.
Wall: Alasdair, thank you very much.
McKinnon: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
