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Contra funds, which bet on beaten-down, out-of-flavour sectors and stocks, are believed to be a good way to play shifts in sector preferences during market rallies. But in many cases, diversified equity funds have delivered superior returns compared with contra funds, even from the same fund house. SBI Contra Fund is a classic example.
The fund not only lagged its benchmark BSE 100 Index over a three- and five-year time frame, but also underperformed peers such as Religare Invesco Contra and Kotak Classic Equity.
Instead, investment in SBI Bluechip, a diversified equity fund with a large-cap slant from the same fund house, would have yielded better returns. In the last one year, SBI Bluechip Fund delivered around 66 per cent, which is 6 percentage points higher than SBI Contra. Also, the fund underperformed its benchmark 60 per cent of the time in the last five years. Investors can use the 60 per cent jump in the scheme’s NAV in the last one year as a good exit opportunity and switch investments to a diversified equity fund with a good track record. The fund’s strategy to stay defensive in 2013 not only impacted its performance but also failed to justify the scheme’s investment objective.
Not really contra In SBI Contra’s case, the fund lost out on the opportunity in cyclical sectors due to lack of meaningful exposure to themes such as metals, capital goods, engineering, construction and financials when the market bottomed out in August 2013.
By end August 2013, almost 32 per cent of SBI Contra’s assets were invested in defensive themes – IT, pharma and consumer goods. SBI Bluechip as well had a little over 32 per cent of its assets in these themes then.
Thus, the fund failed to provide the real flavour of a contra theme.
Comparing the portfolio of SBI Contra and Bluechip Fund, the latter had more multi-baggers than Contra Fund – Bharat Forge, Federal Bank and YES Bank being the notable ones.
The fund did hike exposure to cyclical themes since early this year. Even so, a little over 30 per cent of the scheme’s assets are still invested in defensives. More than a fourth of its assets are invested in financial stocks.
Investment in SBI Contra Fund five years back would have fetched annual returns of just 9 per cent, lower than the gains made by investing in a good diversified equity fund.
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