Market concentration in European equity markets has reached levels that undermine the true diversification of many investment portfolios. A contrarian investment approach can offer attractive long-term return potential, but investors must also be prepared to tolerate periods of discomfort, writes Portfolio Manager Noora Launonen.
An increasing share of both risk and returns in European equity markets is concentrated in a relatively small group of companies, sectors and investment styles. As a result, portfolios may appear diversified while relying on a narrow set of underlying drivers. This has led many investors to look beyond the market's most popular names.
In our latest white paper, we examine the opportunities and challenges of a contrarian investment strategy. Our analysis suggests that when markets become concentrated around a narrow group of companies, attractive investment opportunities are often found outside the mainstream. Successfully implementing a contrarian strategy, however, requires patience, a long investment horizon and the ability to endure periods of discomfort.
Concentration of risk and returns has intensified
Although the MSCI Europe Index, one of the most widely used benchmarks for European equities, comprises more than 400 companies, an increasing share of its performance is driven by a relatively small group of stocks. Among other factors, index weights, capital flows and strong earnings momentum have directed investors towards the same market leaders.
The trend has strengthened steadily over time and is particularly evident from a risk perspective. At the end of June 2026, the 20 largest companies in the MSCI Europe Index accounted for 34.4 percent of the index's total risk, compared with 23.4 percent five years earlier.
The same pattern is evident in returns. Between July 2021 and June 2026, the market-cap-weighted MSCI Europe Index outperformed its equal-weighted counterpart by an average of 3.0 percentage points per year. By comparison, the corresponding annual return differential over the past ten years was just 1.0 percentage point.
Greater concentration also increases sensitivity to shifts between investment styles. The performance gap between value and growth has changed rapidly in recent years. It reached its lowest level of the euro era at the end of 2021 before turning clearly positive by early 2026. Such movements are not unusual but reflect the recurring style cycles characteristic of European equity markets.
Concentration also creates opportunities
Market concentration is not unique to the current environment but a recurring feature of European equity markets. Valuation spreads between value and growth stocks move in clear cycles, with extremes recurring over time.
These cycles create opportunities for contrarian investors, as returns are generated when the valuations of deeply discounted companies begin to normalise. A contrarian strategy becomes particularly relevant when markets are exceptionally concentrated in the same growth and quality companies. Historically, it is precisely under these conditions that the strategy's conditional return expectations have been strongest.
Contrarian investors must, however, carefully assess the risk of value traps, as low valuations do not necessarily indicate attractive investment opportunities.
The risk of value traps also makes a contrarian strategy difficult to implement through a passive value index. By definition, such an index invests in all companies that meet its value criteria, regardless of whether their challenges are temporary or permanent. An active contrarian strategy, by contrast, seeks to distinguish companies that are temporarily out of favour from those facing structural decline.
A long investment horizon and a disciplined investment process matter
Our analysis shows that the returns of a contrarian strategy can be uneven over shorter periods. Over longer investment horizons, however, the probability of outperformance increases, requiring patience and a willingness to remain invested over time.
For investors, maintaining a long-term allocation is generally a more effective way of capturing returns than attempting to time the market. Our analysis shows that while timing strategies reduced drawdowns, they consistently underperformed a disciplined buy-and-hold approach in terms of long-term returns. Historically, capturing the return premium has depended more on maintaining exposure than on identifying the optimal entry point.
Investors must also be prepared to tolerate periods of discomfort, as contrarian strategies have historically tended to underperform during market crises and perform best in subsequent recoveries. Historical evidence suggests that any potential return premium is not realised steadily, but rather represents compensation for enduring extended and, at times, significant periods of underperformance.
The quality of the investment process also matters. A low valuation alone does not reveal whether a company is merely temporarily out of favour or facing more fundamental challenges. Distinguishing between the two is central to the successful implementation of a contrarian strategy.
Evli Hannibal successfully goes against the crowd
The Evli Hannibal fund serves as a practical example of a contrarian investment strategy in our white paper. The fund invests systematically in European companies that are out of favour with the market but remain fundamentally healthy.
Our analysis shows that the conditional return expectations of a contrarian strategy have historically been strongest when markets have been exceptionally concentrated in growth stocks and the value style has been deeply out of favour. Since the fund's inception in March 2007 through June 2026, Evli Hannibal's B share class has generated an annualised return of 7.1 percent, compared with 5.6 percent for the MSCI Europe Index and 4.5 percent for the MSCI Europe Value Index. Over the last ten full calendar years, the corresponding annualised returns were 12.3%, 7.7% and 8.0%, respectively. Source: Bloomberg. Past performance is no guarantee of future returns.
Historically, the strategy has faced its greatest challenges during periods characterised by heightened risk aversion, sharply falling interest rates and a strong preference for growth stocks. Conversely, its role has become most valuable when these market distortions begin to unwind.
Evli Hannibal also illustrates the importance of a robust investment process. The fund's objective is not simply to target value exposure, but to identify situations where market prices diverge from a company's long-term fundamental value. In addition to quantitative screening, investment decisions are based on fundamental analysis, including an assessment of capital allocation, the margin of safety provided by the balance sheet, hidden asset value, normalised earnings, and whether a company's challenges are cyclical or structural in nature.
Learn more about Evli Hannibal
A contrarian strategy complements a portfolio
A contrarian investment strategy can be particularly valuable when a portfolio is already heavily exposed to large-cap, growth or quality stocks. In such environments, diversification may appear stronger than it actually is, and historical evidence suggests that this is precisely when the conditional return expectations of a contrarian strategy have been strongest.
A contrarian investment strategy is not intended to replace broad market exposure, but to complement an existing portfolio by enhancing diversification and increasing return potential. While the strategy can be rewarding over the long term, investors should also expect periods of underperformance.
Evli Hannibal is a good example of the role a contrarian strategy can play in complementing a Europe-focused portfolio. It is best suited for investors with a clear role for such a style allocation, a sufficient risk budget, a long investment horizon, and the ability to tolerate periods of discomfort.
White paper: When Others Sell: Opportunity or Trap?
Dive deeper into the topic in the When Others Sell: Opportunity or Trap? white paper and learn more about contrarian investing through the lens of Evli Hannibal's nearly 20-year history.
Before making an investment decision, investors should familiarise themselves with the fund’s statutory documents, including the fund rules, the Key Information Document (KID), and the prospectus. The fund’s statutory documents and further information are available at www.evli.com/funds. The value of an investment may rise or fall, and investors may lose part or all of the capital invested. The content of this article should not be regarded as investment advice and should not be relied upon when making investment decisions. Past performance is no guarantee of future returns.
About the author
Noora Launonen leads strategic asset allocation and portfolio construction at Evli Fund Management Company Ltd. Her work centres on translating long-horizon return and risk assumptions into investable portfolios, a discipline in which empirical research plays a central role.
Noora brings a strong quantitative approach to allocation questions alongside a practitioner’s understanding of how funds are built, priced and monitored. She holds a Master of Social Sciences degree from the University of Turku, where she majored in economics, and is currently a Level III candidate in the CFA® Program. Noora has worked at Evli since 2021.
