Mutual Funds

Blend of contra and growth strategies

Satya Sontanam | Updated on October 23, 2019 Published on October 23, 2019

Contrarian funds pick out-of-favour stocks with strong fundamentals

One of the basic rules in behavioural economics is to get rid of ‘herd behaviour’, which means individuals are influenced by a group. The contrarian style of investing exploits this rule and invests against market trends — buys what others sell and sells what others buy.

There are three prominent funds in the category — Invesco India Contra, Kotak India EQ Contra and SBI Contra Fund.

They pick stocks with lower valuations but with strong fundamentals. Though these stocks may underperform in the short term, they are expected to perform well over the long run. There is, however, a risk in this strategy, that is, fund manager’s call may go wrong which could lead to the fund under-performing the market.

However, these funds follow a blend of contra and growth investment strategies. According to SEBI’s new re-categorisation of mutual funds, an AMC can either offer a contra fund or a value fund, but not both.

 

 

There is a thin line between the strategies of contra and value investing.

While contra funds choose disliked stocks that have strong asset value and high growth potential in future, value funds invest in stocks which are undervalued because of market inefficiencies and that are traded below their intrinsic value.

Contra funds are suitable for investors with high risk profile with a time horizon of five years or more.

Invesco Contra Fund picks stocks from the BSE 500 companies, which are in a turnaround phase and are trading below their fundamental values. For instance, the fund included the stocks of Mahangar Gas, ITC, and Motherson Sumi Systems during the period between January 2018 and July 2018 when they were trading below their fundamental values. The fund has maintained a diversified portfolio of containing 40-50 stocks. As per a presentation in September 2018, around 69 per cent of the portfolio is invested in undervalued and turnaround stocks.

Kotak India EQ Contra Fund follows a mix of fundamental and quantitative model while constructing the portfolio.

However, the portfolio has been tilted towards large-cap stocks chosen based on a mix of bottom-up and top-down approach. SBI Contra manages the portfolio with a combination of growth and contra investment strategies.

Performance

Contra funds have delivered mixed returns over the last one-year. Kotak India EQ Contra Fund delivered a CAGR return of 13.67 per cent, while Invesco Contra Fund generated 7.19 per cent return. SBI Contra has clocked a muted return of 0.32 per cent.

However, the performance of Kotak India EQ Contra and Invesco India Contra over the medium and long run was notable as they generated higher returns compared to benchmarks.

Over the past three, five and 10 years, Kotak’s contra fund has delivered CAGR return of 11.22 per cent, 10.2 per cent, 11.06 per cent, while Invesco’s contra fund returned 9.53 per cent, 11.41 per cent and 12.99 per cent. Both against S&P BSE 500 TRI index’s return of 9.23 per cent, 9.34 per cent and 10.17 per cent.

SBI Contra Fund has been a laggard with a return of 0.72 per cent and 5.08 per cent in three- and five-year periods. A higher exposure to pharma and industrial manufacturing could have led to the weak performance of the fund.

Published on October 23, 2019
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