This article appeared in The Herald's Special Report: Wealth Management. Read the publication in full.

The herd instinct in investing is a well-known phenomenon. Everyone piles in when the market is doing well and flees when it starts to fall. This accelerates booms and busts and ensures that people lose money by buying high and selling low, which is, of course, the exact opposite of what they should be trying to achieve.

A tried and tested way of avoiding this classic syndrome is to focus on value. Never mind if a company’s share price is being marked down – does your analysis show that it has the potential to surprise on the upside? Alasdair McKinnon, contrarian Manager of the Scottish Investment Trust, adopts just such an approach. The Scottish has also been providing low cost access to the world’s stockmarkets to private investors since it was founded in 1887.

"Our approach as a closed-ended fund is that we do not make any promises with respect to returns, but we give clear guidance on what we invest in. We have a very clear investment style, based on looking globally for unfashionable and under-valued companies," he explains.

This is not an investment style designed to outperform in every market. When money is pouring into the market, buoying up stocks generally and carrying all before it, it is next to impossible for value investing to differentiate itself. However, over time, value investing, particularly with a contrarian bias that looks favourably on stocks that have fallen out of favour, does very well indeed.

"We grew the regular dividend by around 50 per cent last year. We have a very strong record of generating dividend increases and we have a stated aim of beating UK inflation over the long run. We have maintained our record on dividends for the past 34 years, which is a history and track record that is hard to beat," he says.

The logic of looking for stocks that can be aptly described as "ugly ducklings", is that while companies often fall out of favour quite deservedly, the market tends to mark them down for much longer than necessary. They stay under a cloud, as it were, for some time after management has successfully turned things round. That creates the opportunity for careful analysis to identify the strength of the turnaround and to buy in at a great price, before the market in general wakes up to the fact that this is once again an interesting company.

"A real case in point for us was the Australian company, Treasury Wine Estates (TWE). Wine is a deeply cyclical business but even in the worst of the troughs, you don’t dig up the vines, so the potential for turnaround is still there," McKinnon explains.

At the point at which Scottish Investment Trust became interested in the company, the Australian dollar, which had been overvalued had weakened, helping the company’s exports, and it had a reasonable three per cent dividend yield. "We saw that it had a lot of good going for it and that the wine cycle was on the point of turning favourably, so we bought in heavily," he says. New management had arrived at TWE and had said that instead of selling the bulk of their best wines to a discount retailer, they were going to treat it as a premium product and sell to high end outlets, thus increasing profits.

This kind of nose for an "ugly duckling" that is in the process of becoming a swan, makes all the difference and justifies active management, he points out. However, as a value investor, Scottish Investment Trust is keen not to overdo trading. "Trading is very expensive. It racks up costs and you want to do as little as possible."

McKinnon and the Trust team use a quadrant approach. The bottom left box is the "ugly duckling" box, consisting of companies that have done badly but are now turning around. The next box up, one column along, is the "change-is-afoot" group, where things are on the mend but the market is still sour on the company.

The third and final category in the top right corner of the box is the "more-to-come" group, which is where the company is doing well and has some positives still to deliver. However, when they reach this point, they are getting close to the point where the Trust will sell its holding in favour of the next ugly duckling out there.

"We might love some stock market darlings as companies and for their products but if you take the big US tech stocks like Apple, or any of the FANGs, we don’t own their stock. The risk reward doesn’t look right to us, with governments getting concerned about monopoly abuse and wanting to regulate them. The comfortable thing for investors is to think that the FANGs will dominate forever, but history tells a different story," he warns.

This article appeared in The Herald's Special Report: Wealth Management. Read the publication in full.