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Investors holding the units of SBI Contra Fund can book profits as the fund has made 70 per cent gains in the last one-year period.
Even after such superlative performance — which puts the veteran scheme among the chart-toppers in fund categories such as IT, small-cap, mid-cap and infra — the scheme lags the benchmark (S&P BSE 500 TRI) in three- and five-year periods.
The economy is recovering after two quarters of sharp negative growth and the GDP has showed marginal positive up-tick in the third quarter. However, the fund continues to be predominantly geared towards defensives, which increases the probability of underperformance if strong economic growth continues, riding high on cyclicals.
In contrarian investing, funds purposefully go against prevailing market trends. SBI Contra follows a combination of top-down and bottom-up approaches to stock-picking, and chooses companies within the contrarian investment theme.
Unlike peers such as Kotak India EQ Contra and Invesco India Contra — both of which have about 70 per cent large-cap exposure — SBI Contra has less than 50 per cent exposure to big companies. The relatively high allocation to mid-sized and smaller companies helps outperform the benchmark, but it also makes the fund more volatile than peers.
Performance and strategy
SBI Contra has delivered top-of-the-line gains of 70 per cent over the past one year, and 11 per cent and 14 per cent over the past three and five years, respectively, against the S&P BSE 500 TRI returns of 49.8 per cent, 13.8 per cent and 16.9 per cent over the same one-, three- and five-year periods, respectively.
When the broader markets were recording new highs in November and December 2019, and witnessed a temporary saturation point, the scheme reduced its equity allocation to a low of about 80.75 per cent and increased the debt portion to 15.5 per cent.
Thereafter, it upped its equity allocation gradually, and currently has about 94-95 per cent exposure.
Last year proved to be great for the fund as it navigated the ups and downs successfully. But these gains came after forgettable performances in 2018 and 2019.
Over the past one year, banks, pharma and software have been the scheme’s top preferred sectors.
Currently, banking is the most preferred sector with private-sector lenders such as Axis Bank, ICICI Bank and HDFC Bank among the top stocks in the portfolio. The strong rally in the banking stocks seems to have boosted the fund’s NAV.
Betting on IT and pharma stocks, such as Infosys, HCL Technologies, Sun Pharmaceutical Industries and Lupin, have also yielded good returns.
Despite exposure to banking, SBI Contra’s current sectoral positioning is broadly defensive.
This strategy may not yield high returns if cyclicals continue to drive economic growth.
The fund’s large-cap allocation is about 48 per cent of the portfolio while the small-cap takes a bigger share of over 30 per cent, and the mid-cap allocation is 15 per cent.
Though investing in small-caps can deliver higher returns, it remains to be seen if such returns sustain over the long run.
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