Contrarian strategies are tough to run. Unlike trend-following strategies, the more a contrarian strategy underperforms, the greater the incentive to stay invested. 

Our experience in systematic value investing has shown us that it’s possible to experience several years of drawdown before the approach fully recovers and potentially reaches new highs. As such, we believe that contrarian strategies present attractive opportunities but only when paired with prudent management and proper risk mitigation.
 

Our TargetNetZero strategy positions against the current trend of low-carbon investing. Such approaches penalise all high-carbon companies unconditionally, driving down their valuations (see figure 1). This creates opportunities away from the herd for more refined stock selection, in our view.
 

We aim to find companies in high-carbon sectors that are most aligned with the goals of the Paris Agreement. Identifying these companies requires far more research and analysis than simply measuring their carbon footprints today. 

We use LOIM’s proprietary Implied Temperature Rise methodology to provide a forward-looking assessment of companies’ transition plans. The tool enables us to find high-carbon companies with credible plans to decarbonise that we believe are likely to reduce emissions ahead of their peers – we favour these names in our equity portfolios and believe their valuations could offer attractive prospects for investors. Selection takes place in the context of tightly controlled risk management that maintains a low tracking error relative to the benchmark.

Rather than following the trend for low-carbon approaches, we believe our TargetNetZero transition approach offers investors strong potential for untapped value.

FIG. 1. Relative valuation of high-carbon companies¹