Many investors follow the ‘trend is your friend’ route to investing. A few, though, go the other way by betting against the trend, in other words doing contra-investing. Fund managers following this style select undervalued stocks or sectors (since they are not in favour). The hope is that these stocks or sectors will likely be re-rated or their worth noticed in the longer run, and hence do well.
When markets were on a downtrend a few years ago (2008-09), there were six or seven mutual fund schemes that followedthis kind of an investment mandate. In subsequent years, however, some of these weremerged with others funds.
Now, there are only three funds which follow this approach. These are Religare Invesco Contra, SBI Contra and UTI-Contra.
In the past one year, all three have underperformed their respective benchmark indices. Over three- and five-year periods, Religare Contra alone has outperformed its benchmark, the BSE 500 index. SBI Contra and UTI Contra both worse off compared with their benchmarks, the BSE 100 and the BSE 200.
Funds overview Religare Contra’s current top sectors are banks, software and consumer non-durables, with allocations of 17, 14 and 9 per cent respectively. These may not be much against the tide, but capital goods, construction and engineering form other high holdings. These sectors have been on the wrong side of market fancy for quite some time now.
With allocations of 8 and 6 per cent, Reliance Industries and Bharti Airtel were the fund’s top pick two years ago, a time when these stocks weren’t preferred. Britannia Industries is another off-beat pick, and is currently the top portfolio stock with an 8.3 per cent holding.
In fact, the fund keeps churning its top ten holdings. In the software space, the fund trimmed its allocations in Infosys and raised holdings in Tech Mahindra and Wipro.
Another example of a contra pick paying off is VA Tech Wabag, in which the fund started raising stake during May this year. The stock was under pressure between January and August 2013. The stock has since recovered quite well.
SBI Contra too prefers financial services and software sectors with present allocations at 21.6 per cent and 15.3 per cent, respectively. On the stocks front, the fund decreased its allocations in State Bank from 5 per cent a year ago to 3.5 per cent now. Reliance Industries, which has been underperforming, is the fund’s top holdings with a 6 per cent share. ICICI Bank, HDFC Bank and Infosys and ITC are the other top holdings.
Financials are UTI Contra’s top sector choice too, but the fund follows this up with high holdings in sectors such as energy, metals and mining, textiles, and construction. Compared with the BSE 200 (its benchmark), the fund is actually overweight in metals and media.
The fund has upped its holdings in Infosys and Reliance Industries over the past one year to 7.8 and 7 per cent. It also increased allocation to an unusual pick in Vardhman Textiles, which holds a 4.2 per cent share (3.3 per cent a year back). The stock has been on a strong run in the past two years. Exposure to media stocks such as Zee Entertainment and PVR has also paid off.