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Contrarian Investment Ideas for 2010

A few against-the-grain ideas that should pay off in the new year.

Michael Breen, 12/15/2009

Talk about drawing the short straw: Generating a list of contrarian ideas for 2010 is no easy task with nearly every domestic- and foreign-stock category gaining more than 20% in 2009 and their fixed-income brethren not far behind.

And the few categories that have posted losses this year, like long-government and bear-market funds, don't appear obvious candidates for a rebound. But with some digging, I came up with a few ways to successfully counter prevailing wisdom.

Two Strikes .
A handful of funds that had a putrid 2008 and have also lagged badly in this year's rally still have something to offer.

CGM Focus CGMFX
A poster child for this group, Ken Heebner's fund lost 48.2% last year and is up just 9.8% in 2009, trailing 99% of its large-growth rivals. Ouch. Heebner is a rapid trader who makes big, bold bets. He's gone off the rails lately, but this fund has always had a feast or famine risk/reward profile, and Heebner has delivered in spades over time: The fund still tops nearly all its peers over the past decade. This one isn't for the faint of heart, but Heebner's past history says he's down but far from out.

Brandywine BRWIX and Brandywine Blue BLUEX
These two haven't fared as badly as CGM Focus, but they've been plenty stinky. Veteran manager Bill D'Alonzo and his team run both funds with a focus on firms that have rapidly accelerating earnings. They do their homework, spending loads of time interviewing not only firms, but their suppliers and vendors. Still, they've been badly off the mark lately. But this team has had big dry spells before and has always proven resilient. Expect the same.

Bridgeway Aggressive Investors 2 BRAIX, Small Cap Value BRSVX, Small Cap Growth BRSGX, and Ultra Small-Company Market BRSIX
Bridgeway's funds prove that quant-heavy strategies can have trouble in extreme, momentum-driven markets. These funds have all been hit hard, losing more than most in 2008 and not keeping pace in 2009. But John Montgomery and his team have proven themselves over the past decade, and they should get back on track. The funds are reasonably priced and provide great small- and micro-cap exposure.

Quality Counts
Equity funds with high-quality portfolios lost much less than most in 2008's meltdown and looked poised to rake in assets as investors who were spanked by big losses in funds holding dodgy fare sought safe harbor. It didn't happen. Some investors abandoned stocks altogether. And the rally that started in March 2009 has brought risky funds back from the dead, erasing investors' collective memory about the importance of downside protection. How quickly we forget.

The rally in speculative fare has also left many funds that shun junk trailing the pack this year, and investors have stayed away. That's too bad. Though they may lag racier peers, funds that can acheive solid gains in buoyant markets while losing less in downdrafts have a recipe for long-term success. And owning cautious funds after big rallies is a good way to avoid getting whipsawed in a shaky recovery.

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