(Bloomberg) -- Last year, the two managers of a contrarian value fund outperformed 95% of peers by loading up on out-of-fashion UK stocks. In 2024, they’re strengthening this bet while steering mostly clear of US equities.

Anne Christine Farstad of MFS Investment Management sees the UK as an attractive market where she can find cheap stocks which have limited room to weaken. Exposure to commodities and a global operational footprint also mean many companies have little to fear from domestic pressures, she said.

The MFS Contrarian Value Fund, with almost €1 billion ($1.1 billion) in assets which Farstad jointly oversees with Zahid Kassam, had a 24% allocation to the UK at the end of March, the most for any market. This compares to the benchmark MSCI World Value Index’s 4.3% exposure. 

Markets in Europe are another significant contributor, with France leading the continent’s allocation with 12%.

While Farstad has been overweight UK since the fund’s inception in 2019, her preference for European and London-listed stocks is gaining wider traction as investors turn toward the region for the next leg of the global equity rally. The FTSE 100 has outperformed the S&P 500 this quarter, making up ground after a relentless surge in US stocks since October.

Farstad and Kassam’s exposure to the US stood at 10% at the end of March, compared to the benchmark’s 71%.

“We have seen a gigantic disconnect between European and US markets,” Farstad told Bloomberg in an interview. “That’s probably the largest high-level contrarian thing in markets today.”

UK stocks, especially, have trailed behind global peers for years as a lackluster economy and political upheaval weighed on sentiment, with the country’s benchmark lagging the annual performance of the MSCI World Index for developed markets four times since 2019.

The top contributors to Farstad’s fund in the first quarter were Natwest Group Plc, which has surged more than 20% over the period, as well as Babcock International Group Plc with share gains in excess of 30%, she said. Novonesis, Weir Group Plc and Spectris Plc were the three biggest holdings by portfolio weight at the end of last month.

Another favorite is Next Plc, which followed-up a 40% rally in 2023 with almost 15% in gains so far this year. Despite the advance, the UK clothing retailer is still trading at around 14 times earnings, compared to fellow US retailer TJX Cos trading at almost 24 times — another reason why Farstad shuns US stocks.

Farstad and Kassam’s fund has outperformed 58% of peers so far this year, according to data compiled by Bloomberg. The performance has, however, picked up again in the past three months to beat 91% of their competitors.

While sticky inflation could pose a threat to UK stocks as it would require interest rates to remain higher for longer, any weakness stemming from the July elections could be an opportunity to load up on the region’s stocks, Farstad said.

“An environment of increased economic and political uncertainty can create opportunities for contrarian investors with a long-term approach,” she said.

--With assistance from Farah Elbahrawy.

(Updates with biggest holdings, company name)

©2024 Bloomberg L.P.