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Sunday, Dec 25, 2005

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Kotak Contra: Hold

Aarati Krishnan

KOTAK Contra has not delivered the quick gains that investors have now come to expect from new fund offers. In fact, with a sedate 15 per cent return since its debut, the fund's returns pale in comparison to other new funds unveiled at the same time. However, by its very nature, a contrarian investment strategy will take time to deliver returns and should not be evaluated over a short time-frame. In the five-months since launch, Kotak Contra has certainly remained true to its mandate of contrarian investing.

Both its portfolio composition and the stock choices made so far, hold appeal. Those who invested in Kotak Contra should hold their units, as it has the potential to deliver reasonable returns over a three-five year time frame.

The fund is most suited to investors who can handle a five-year wait and already hold a portfolio of diversified equity funds. Investors who don't fit this profile should switch into a plain diversified fund with a good record.

Kotak Contra aims to invest in "fundamentally strong companies that are currently undervalued", and it has so far fulfilled this mandate quite effectively.

Sectors such as steel, fertilisers and PSU banks are among the top sector choices in the portfolios revealed over the past three months, indicating that the fund has stayed away from the beaten track. Most diversified equity funds have favoured sectors such as capital goods, automobiles and chemicals over the same period.

The stock choices so far suggest that the fund now finds cyclicals more attractive than growth stocks. This appears to fit well with the contrarian mandate. In end November, the portfolio featured stocks such as Tata Steel, SAIL, Coromandel Fertilisers and Tata Chemicals among its top holdings. This has contributed to a `value-oriented' portfolio, with the average P/E of Kotak Contra's portfolio hovering at 13 times by November. Other equity funds managed by Kotak Mutual now carry a P/E of between 18 and 22 times.

The tilt towards cyclicals and `value' stocks has worked against the fund during the recent market rally, when growth stocks have appreciated strongly. As a result, the fund's performance over the past five months has been lacklustre. Since its inception in July, the fund's returns of 15 per cent have been well behind the CNX 500's returns of 21 per cent.

The fund has also trailed Magnum Contra Fund, which has registered a 25 per cent return over the past five months. But Magnum Contra has a very different and more aggressive investment strategy and cannot strictly be compared to Kotak Contra.

Kotak Contra was launched in July 2005. The fund manages assets of Rs 483 crore. It is managed by Mr Anand Shah.

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