Markets have a habit of taking good ideas too far. In 2021, investors could not get enough of technology stocks. More recently, enthusiasm for artificial intelligence has driven vast amounts of capital into a handful of mega-cap companies, helping propel US equities to new highs. While these businesses may well justify their valuations, history suggests that when investors crowd into one area of the market, opportunities can emerge elsewhere.
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Contrarian investing is not about being different for the sake of it. Rather, it focuses on identifying areas where sentiment has become excessively negative, and valuations no longer reflect long-term fundamentals. The challenge, of course, is that these opportunities rarely feel comfortable at the time.
As economist John Maynard Keynes famously observed: “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”
Investors are naturally drawn towards what has worked recently and reluctant to allocate capital to areas that have disappointed. Yet some of the strongest long-term returns have historically been generated by investing in markets that others have abandoned.
Today, several areas of the market fit that description.
UK equities: continually ignored despite improving fundamentals
Despite a strong recovery in recent years, UK equities remain one of the most under-owned developed markets globally. Domestic investors have been withdrawing capital from UK equity funds for much of the past decade, while international investors have largely preferred the growth opportunities available in the US.
The result is a market that continues to trade at a significant valuation discount to many global peers. At the same time, the UK offers attractive dividend yields, strong cash generation and significant exposure to sectors that are underrepresented elsewhere, including financials, energy and industrials.
The Artemis UK Select fund has benefitted from this environment. Managed using a high-conviction, multi-cap approach, the portfolio typically holds between 40 and 50 companies across the UK market. The managers have often had a value tilt to this fund, an approach that has delivered impressive long-term results. Over the past decade, the fund has returned 204%, compared with 91% for its sector, while over the past three years it has returned 66% against a sector average of 32%*.
The UK also offers diversification benefits at a time when many portfolios have become increasingly concentrated in US technology stocks. Jeremy Smith, manager of CT UK Equity Income, has previously highlighted the UK’s “shock-absorbing qualities”, pointing to the market’s significant exposure to hard assets and businesses that have historically proved resilient during periods of global uncertainty.
China: opportunity or value trap?
Few markets divide opinion as sharply as China. Even within our own investment team. After years of regulatory intervention, property market weakness and continued geopolitical tensions weighing heavily on investor sentiment, Chinese equities have staged a slight recovery in 2025; however, many investors remain cautious.
For contrarian investors, however, this is precisely where opportunities can emerge. China’s economy continues to represent a significant share of global growth, while many high-quality businesses are trading on valuations that would be difficult to find elsewhere.
FSSA All China takes a distinctive approach to the market. Unlike many competitors, the fund invests across the entire Chinese equity universe, including the domestic A-share market, which remains under-researched by many international investors.
Smaller companies: neglected and undervalued
The dominance of mega-cap technology stocks has left smaller companies largely overlooked. Higher interest rates, reduced liquidity and the rise of passive investing have all contributed to a challenging backdrop. As capital has flowed into index funds, an increasing proportion has naturally been directed towards the largest companies in the market, leaving smaller businesses trading on increasingly attractive valuations.
Japan provides an interesting example. While investor enthusiasm has returned to the country’s large-cap exporters and globally recognised brands, many smaller companies continue to receive limited attention.
M&G Japan Smaller Companies focuses on this area of the market through a bottom-up, valuation-sensitive approach. Manager Carl Vine and his team seek businesses with strong long-term growth prospects that are trading below their intrinsic value. Their deep knowledge of the Japanese corporate landscape has helped deliver strong results, with the fund returning 228% over the past decade, compared with 156% for the wider sector*.
Closer to home, the situation in UK smaller companies may be even more compelling. Valuations remain depressed despite a steady stream of takeover activity from private equity firms and overseas buyers, many of whom appear to recognise value that public markets have overlooked.
Liontrust UK Micro Cap focuses on one of the most neglected areas of the market. The fund applies the team’s established Economic AdvHowantage process to identify businesses with durable competitive strengths operating in a segment that often receives little analyst coverage.
The managers recently noted that UK micro-cap valuations remain significantly below broader market levels despite many portfolio companies generating superior returns on capital, higher profit margins and lower leverage than the wider market**. While sentiment remains weak, the fundamentals appear considerably stronger than current valuations suggest.
The forgotten middle of America
It may seem strange to describe any part of the US market as unloved. However, investor attention has become increasingly concentrated in a relatively small group of mega-cap technology companies.
This has created what some commentators describe as an “institutional blind spot” within US mid-cap equities. Neither large enough to dominate index returns nor small enough to attract specialist investors, mid-sized businesses have largely been left behind.
Historically, this part of the market has often delivered attractive risk-adjusted returns. Research from Brown Advisory suggests US mid-cap companies have generated some of the strongest long-term returns across the US equity market while providing valuable diversification benefits relative to large-cap stocks***.
Schroder US Mid Cap seeks to capitalise on these opportunities by investing in companies within the bottom 40% of the US market by capitalisation. Managed by Bob Kaynor out of New York, the fund focuses on businesses with strong growth potential that remain underappreciated by the wider market. With approximately one third of the portfolio currently invested in industrial companies****, the fund also offers exposure to areas of the economy that have been overshadowed by the technology sector.
The value of looking beyond the crowd
Contrarian investing is rarely comfortable. The areas that offer the greatest potential opportunity are often those attracting the most negative headlines and the least investor enthusiasm. It’s important to note that not every unloved market will prove rewarding, and patience is often required. However, for investors willing to look beyond prevailing narratives, current valuations in these neglected areas could present attractive long-term entry points.
