Speaking at a media briefing in Sydney yesteday, New York-based Rupal J. Bhansali, Chief Investment Officer, International and Global Equities at Ariel Investments, said investors have become obsessed with stability and have developed an aversion to volatility, which has led them to accept the “certainty of low returns for the hope of low risk.”

“Stability is not always your friend, and volatility is not always your enemy,” Ms Bhansali said. “By using proven principles of contrarian value investing, investors can achieve high returns and low risk by owning stocks of quality companies trading at a discount due to concerns about volatility. Conversely, investors should avoid buying stocks selling at a high premium for their perceived stability.”

Ms Bhansali describes contrarian investing as buying securities when they go “on sale,” but avoiding those that are offered “on clearance.” She adds, “Contrarian investing works best when backed by independent thinking and patience.”

Ms Bhansali said it is better for investors to focus on valuations, which is often the tipping point between risk and reward, rather than labels or perceptions of stability and volatility.

“Many investors think stability is equated with reducing risk, but in reality, they may have merely swapped risk, not reduced it,” she said. “Overpaying for stability can result in underperformance or losses. On the other hand, going long on volatility at a discount can work in your favour in generating returns.”

Ms Bhansali points to the U.K.-listed drugmaker GlaxoSmithKline, which is currently deeply out of favour due to product pipeline disappointments and earnings volatility, as an example to illustrate her contrarian approach.

“We like the business due to the high barriers to entry, attractive long-term economics and resilient cash flow profile across its three business lines,” she said. “Lower earnings expectations with low valuations can create a margin of safety. We think the stock is now on sale.”

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