Investors' preference for stability is causing them to miss opportunities, particularly in market segments that are currently out of favour, says Ariel Investments.
Speaking in Sydney yesterday, Ariel Investments chief investment officer of international and global equities, Rupal Bhansali, said investors are overpaying for perceived stability.
“Stability is not always your friend, and volatility is not always your enemy,” Ms Bhansali said.
Ms Bhansali explained that when you disagree with the market, and reject certain investment trends, you can make a substantial profit.
“I think you can tell that when something is hated that much, it can be your source of opportunity,” she said.
Ms Bhansali argued that owning stocks that are trading at a discount due to volatility concerns, is an ideal way to achieve high returns and low risk.
“Going long on volatility at a discount can work in your favour in generating returns," she said.
Ms Bhansali gave the example of UK-listed pharmaceutical company GlaxoSmithKline – out of favour and experiencing earnings volatility.
“We like the business due to the high barriers to entry, attractive long-term economics and resilient cash-flow profile across [the company’s] three business lines,” Ms Bhansali said.
“Over time we feel you will make a better performance statement by owning something that is high quality, at a discount, than owning something that is high quality but at a premium.”
Moreover, Ms Bhansali warned investors to avoid investment trends or “fashion statements”.
Ms Bhansali noted that Ariel Investments, as contrarian investors, takes a negative position toward Apple.
According to Ms Bhansali, although the company is perceived to be stable, its value is priced in but it's risks are not.
"Many investors think stability is equated with reducing risk, but in reality, they may have merely swapped risk, not reduced it."
“The dream of stability can become the nightmare of volatility,” said Ms Bhansali.