Swimming against the tide: A contrarian’s view on today’s markets

Fifteen years of running his own funds management business has taught Adrian Rowley, chief investment officer at Watershed Group, a valuable lesson: If you position for the consensus view, you’ll lose money.   

Describing his investment approach as “genuinely contrarian”, it’s a story he’s seen play out time and time again in markets.   

“Once something’s a consensus view everybody’s positioned for it and the environment always changes,” Rowley said.  

He referenced 2021 and the popular view that the US Federal Reserve wouldn’t raise interest rates until 2025.  

“That’s how everyone was positioned, and it was absolutely wrong,” he said.  

The Fed increased its benchmark interest rate 11 times between March 2022 and July 2023.  

During that period, the outlook quickly swung to a hard landing and nasty recession.   

However, Rowley recalls thinking it was too soon to position for that.   

“So, we aggressively bought those market dips,” he said.  

The Watershed Growth Model won the Multisector Growth – Separately Managed Account (SMA) category at the Financial Newswire/SQM Research Fund Manager of the Year Awards 2024.

The fund has performed above its benchmark, the FE UT PG Multi Asset Growth Index, over a five-year period, delivering 8.69% per annum net versus 6.05% (as at August 31, 2024).    

Rowley and his team are now positioning for that hard landing, building up cash in the fixed income and equities parts of the portfolio, whereas markets are priced more bullishly.

They are favouring defensive sectors within the equity sleeves, such as healthcare and consumer staples, but also remain overweight five of the Magnificent Seven technology companies. They have zero exposure to unlisted assets and private markets. 

However, his approach is not just about risk management, with moments of big dislocations presenting opportunities for his team to add value.  

“But that means you do need to be contrarian and a bit uncomfortable in doing that because it can require a lot of patience and it can take time,” Rowley said.  

“Markets can be overvalued or undervalued for a lot longer than you would expect.”

Rowley launched the firm with his brother Adam in 2009 after working within the portfolio management team of London Partners, where Adrian was CIO.  

They’re close to reaching $2 billion in funds under management across their suite of SMAs. 

Watershed Group runs four multi-asset models; moderately conservative, balanced, growth and high growth. 

Each is built from sector SMAs they manage themselves (Australian share, emerging leaders, international share and income) plus a few other exposures run by external managers.  

Keeping the majority of the management in-house enables Watershed to implement their macro view more efficiently, as well as keep a lid on costs. 

“If you have a macro view and you’re then trying to implement that across the portfolio but you’re outsourcing the underlying management to different groups, it’s near impossible,” Rowley said. 

The Watershed Growth Model is open to retail and wholesale investors and has a minimum investment of $150,000, which may vary slightly across different platforms.