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Contrarian Funds Chart Own Path

Warren Buffett best described how to be a contrarian investor: "Be fearful when others are greedy, and greedy when others are fearful." In other words, move counter to the crowd.

Investors like Buffett are proof that a contrarian approach can reap big rewards. But in recent years, most contrarians have underperformed as a small group of popular, fast-growing tech companies have fueled stock market gains.

“That said, a smart investor would do well to give stock funds with a contrarian approach a closer look,” says Nellie Huang, Kiplinger’s Personal Finance.

Contrarians buy what others shun. Because out-of-favor assets tend to be cheap, the strategy of contrarian investing is similar to value investing, which focuses on assets that are underpriced based on certain measures. But not all contrarian stocks are value stocks. A fast-growing tech firm can be a contrarian choice at times. Here are four funds that take a contrarian approach:

Dodge & Cox Stock (DODGX). This boasts the lowest annual expense ratio of our contrarian picks: 0.52%. The managers at this large-company U.S.stock fund invest with a three-to-five-year holding period in mind and will wait even longer for troubled firms to turn around.

The fund's strategy tends to result in streaky returns. With a 1.6% loss for the past 12 months, it trails 72% of its peers. But investors who stick with the fund have been richly rewarded. Over the past 10 years, Stock outpaced the S&P 500 and ranked among the top 20% of its peers.

Heartland Value Plus (HRVIX). Managers Bradford Evans and Andrew Fleminglook for unloved and undervalued small-cap stocks with strong balance sheets. Dividends are a plus, too. On top of that, Evans and Fleming want to see a solid plan to improve revenues and earnings. The portfolio holds 43 stocks, with an average market value of $1.7 billion. The fund currently yields 0.59%.

The fund has had an 11.0% annualized return since 2016. The expense ratio is 1.18%.

Janus Henderson Contrarian (JSVAX). Since manager Nick Schommer took over in mid-2017, the fund has returned 12.2% annualized, which narrowly beats its benchmark. Expenses are a low 0.74%.

Schommer has overhauled the portfolio, winding up with 39 stocks that fit into one of three categories: what he calls misunderstood businesses; undervalued companies whose parts are separately worth more than the whole; and firms whose earnings and revenue growth rates are underappreciated.

Meridian Contrarian (MFCAX). You've got to take the good with the bad with this fund. The A shares of Meridian Contrarian charge a 5.75% load, but you can buy shares for no fee through Schwab. The high, 1.60% annual expense ratio is a turnoff, but in the past, the fund's performance has made up for it. Over the past five years, it returned 8.1% annualized. That beats its benchmark and 86% of its peers. Manager James England favors small and midsize companies, but he can invest in firms of any size.

England's ideal stock trades at a discount, but the business must also have a problem that can be fixed and a good strategy to fix it.

Editor’s Note: Nellie S. Huang is a senior associate editor at Kiplinger's Personal Finance magazine, www.Kiplinger.com.

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