The Hindu Business Line : JM Contra: Hold

Investors can retain their units in JM Contra. While the fund’s return of 8 per cent since inception in September 2007 has underperformed its benchmark BSE-500, there has been a marked improvement in returns in 2008.

The fund’s offbeat view of ‘contrarian investing’ together with the active use of derivative strategies, hold potential to provide reasonable returns with limited downside risks.

As the fund’s eight-month stint is not adequate to demonstrate a strong performance record, investors can avoid fresh exposures for now.

Contra investing: The fund does not seek to merely rely on value-investing based on valuation parameters such as price to book value and PE. The fund would include the following strategies:

Identifying under-owned stocks or sectors and invest in them based on fundamentals.

Taking exposure to out-of-favour stocks or sectors that have prospects for out-performance and gaining from the first wave of positive move in such stocks. Identifying new investment themes and building positions before the market does.

Suitability: JM Contra’s investment style could mean periods of inactivity (where the fund would be required to hold stocks that are out of market favour) followed by sharp increase in returns when the stocks witness positive sentiments in the market.

The fund may also find it challenging to outperform its benchmark consistently on a rolling return basis.

Hence, investors would have to hold a long-term view or book profits when the fund demonstrates sharp acceleration in returns.

Performance: Since its inception, JM Contra has managed to contain risks better than its benchmark. It returned of 2.4 per cent as against BSE-500’s negative return of 9 per cent over the last 6 months. Over this period, the fund ranks second among the five funds that managed positive returns in the diversified equity fund category.

Similarly, the scheme features in the top quartile of the performance chart of funds that limited their declines in the last three months.

JM Contra witnessed a surge in performance with a return of 22 per cent over the past one month. The fund’s contrarian strategy appears to have worked in its favour in sectors such as technology and oil and gas in the recent past.

The fund has now (post February 2008) increased its stake in sectors such as capital goods and construction. Many stock from these sectors had witnessed sharp sell-offs in the last quarter, leading to what the fund terms as ‘under-owned and under-valued’ positions.

The fund has been using derivative strategy to provide some cushion against downside risks. For instance, in its portfolio of March 2008, the fund was short on Nifty futures.

Similarly, its strategy to short stock futures may be targeted at generating excess returns without additional risk (alpha generators).

While the fund has been increasing exposure to mid-caps, significant allocation to stock and index futures has resulted in a large-cap tilt. The fund has taken concentrated holdings to top sectors, with the exposure however reflecting a mix of stocks and stock futures.

The fund’s assets under management were Rs 712 crore as of March 2008, lower than the corpus on inception. Mr Sandip Sabharwal manages the fund.

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