"Investors are over diversified, using too many products and have too many stocks in their portfolio. Being fully diversified is not necessarily a protection as the markets become more correlated," said Hansen. "The idea is that different asset classes perform differently in the same cycle but that hasn't been happening. Stocks, bonds, real estate and commodities are going in the same direction, so the diversification strategy isn't working."
Pundits say the benefits of index mutual funds and ETFs outweigh the bad for certain individual investors.
"People are relying on more index-based products in mutual funds and ETFs not just for the diversification but also because they have low cost structure. Those are facts and they are good things for investors who have a long-term view of investing," said Todd Rosenbluth, a Manhattan-based mutual fund analyst with S&P Capital IQ, a research fund that ranks and comments on mutual funds and securities.
While Hansen's firm manages $35 million in assets, his fund contains 23 stocks and is categorized as multi-cap value.
"We create long-term growth of capital by investing in companies that we believe will have an improving trend in return on invested capital," said Hansen. "We start our process with a proprietary screen that helps us identify companies where profitability is depressed compared to its historical average and the stock is cheap relative to its earnings power. We invest in companies in which we believe profitability will return to its normal level."
For example, Avon makes up 4% of Hansen's fund. It had been profitable until 2008 when one scandal after another surfaced.
Avon is the subject of allegations that its staff bribed foreign officials in China and Latin America. For the past two years, the company has been conducting an internal investigation into the allegations but it is now officially being investigated under the Foreign Corrupt Practices Act (FCPA). Being found guilty under the FCPA can potentially lead to huge fines. More recently Avon withdrew its 2011 revenue outlook when its net income fell 1% after implementing a software system in Brazil disrupted business there.
Just last week the cosmetics company rejected an unsolicited $10 billion bid from Coty, a competing fragrance company behind perfumes for Adidas, Halle Berry, Beyonce, Lady Gaga, Marc Jacobs and many others.
"We like buying stocks such as Avon at prices well below their intrinsic value when their valuation is depressed because profitability has already collapsed. Many companies in this situation also pay a good dividend," says Hansen. "Avon pays 4.2%, Brown Shoe pays 3.0% dividend and Century Link pays a 7.9% dividend."
Brown Shoe Company is a $2.6 billion, global, footwear company while Century Link is the third-largest telecommunications company in the United States, providing broadband, voice, wireless and managed services to consumers and businesses.
Overall, the portfolio's total dividend payout is 2.3% compared to 0.89% for the average 12-month yield of the Multi-Cap Value Funds classification through March 31, 2012, according to Lipper.
"They're invested in contrarian companies that could pull down their dividend," said Tom Roseen, head of research services with Lipper. "They are more concerned with the story of the stock and its comeback more than dividend. That's the idea behind contrarian investing."
The average return for the multi-value category was 1.79, but the Linde Hansen Contrarian Value Fund returned only 0.1% return.
"The numbers prove that it's difficult for funds to outperform the S&P 500 Index. Hansen's fund has only been around two months, so when we've seen more of a track record we'll have a better sense if they are living up to their expectations," Rosenbluth told Financial Advisor magazine.
"Going forward, we expect economic growth to be subdued as the global delivering continues. Without a solid wind at the economy's back we think it's going to be hard for the broad market indices to generate satisfactory returns over longer periods of time," said Hansen. "We think you need to get back to the basics of investing and pick individual stocks because there will be businesses out there that can create value."
Overall, the value sector had a 12.17% compared to the growth category return of 15.38% through March 31.
"Growth is in favor but the Linde Hansen fund is going for a more deep value play in buying the unfashionable industrials, consumers and financials," Roseen told Financial Advisor magazine. "But when you go after these companies that have good potential and value, it will take more than two weeks to evaluate. It may not be an immediate return. It could take two to 18 months."
In the financial sector, the Linde Hansen Contrarian Value Fund owns only two insurance stocks: Renaissance Re and XL Group. Their combined weighting is 7% of the portfolio.
"That's bigger than I thought they would have," said Roseen. "Investors are dabbling in financials again and getting a result from it, but the traditional value plays of banks, utilities and financials have had some tough times."
Last year, financial services equities funds saw $3.5 billion in redemptions, the largest outflow since 2007 compared to the largest inflow of $17.7 billion in 2008, according to Lipper. So far in 2012, there have been $3.08 billion invested in financial services equities fund compared to $1.2 billion in outflows.
Despite an excessive amount of exemptions in the utility sector, about 12% of the Linde Hansen fund follows stocks that could be classified as utilities.
"Higher gas prices and higher raw materials prices are currently causing utility fund outflows," said Roseen.
About $1.03 billion flowed out of utility equity funds in the first four months of 2012 compared to only $50 million in outflows for the entire year 2011, according to Lipper. While utility funds attracted $5.5 billion in 2011, so far utility funds have only attracted $80 million in 2012.