Invesco India Contra Fund: Identifying Contrarian Opportunities - Outside View by PersonalFN

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Invesco India Contra Fund: Identifying Contrarian Opportunities
Jul 9, 2021

Contra Funds are a subset of value style funds. These funds take a contrarian view on stocks and sectors going through a temporary tough phase. The performance of stocks/sectors during this phase leads to distortions in their valuations. Contra Funds aim to capitalise on these distortions by investing in such sectors and stocks that are available at a significant discount to their fair valuation.

Since contra funds invest in out of favour stocks, these funds may have a better ability to protect your investment from the downside risk. The strategy is based on the assumption that once the short-term distortions become irrelevant or are completely eliminated, the stocks will bounce back to its real value. Accordingly, when the stocks/sectors regain their fair value, it can reward investors with superior returns.

Therefore, Contra funds can act as an effective strategy for portfolio diversification. It works as a good hedge against market corrections.

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Invesco India Contra Fund (IICF) has done well to realise the full potential of its contrarian stock picks and create significant wealth for investors in the long run.

Graph 1: Growth of Rs 10,000 if invested in Invesco India Contra Fund 5 years ago

IICF, as the name suggests, is a contra-style equity scheme that follows an against-the-tide kind of investment approach. The fund has a proven performance record of benefiting from timely contrarian bets by investing in temporarily out of favour stocks and sectors available at significant discount to their fair valuation. The fund managers look for temporarily ignored, but fundamentally sound stocks, and holds high conviction in their long-term growth potential. IICF's ability to generate alpha in bull markets stands out compared to its peers and the benchmark. It has done well during bearish markets too. An investment of Rs 10,000 made in IICF 5 years back would have appreciated by about 18.6% CAGR to Rs 23,322. A simultaneous investment of Rs 10,000 in the benchmark S&P BSE 500 - TRI would have been valued at Rs 20,632, at a growth of around 15.7% CAGR.

Table: Invesco India Contra Fund's performance vis-a-vis category peers

Scheme Name Corpus (Cr.) 1 Year 2 Year 3 Year 5 Year 7 Year StdDev Sharpe
SBI Contra Fund 2,248 86.60 28.81 18.41 15.13 13.93 24.76 0.164
Invesco India Contra Fund 7,529 53.92 23.01 16.82 18.58 17.46 22.88 0.161
Kotak India EQ Contra Fund 1,014 56.99 21.58 16.80 18.25 14.99 22.44 0.166
S&P BSE 500 - TRI 56.54 20.58 15.57 15.67 13.08 22.83 0.152
Returns are point to point and in %, calculated using Direct Plan - Growth option. Those depicted over 1-Yr are compoundedannualised.
Data as on July 07, 2021
(Source: ACE MF)
*Please note, this table only represents the best performing funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.

IICF has time and again maintained its top spot in the contra funds category. It has distinctly outperformed the benchmark S&P BSE 500 - TRI across most time periods. Even though IICF underperformed the index in the last 1 year, its returns over the 5-year and 7-year periods have been remarkable. During this time frame, it has managed to generate an alpha of around 3-4 percentage points.

IICF has shown reasonable volatility in performance, facilitating it to generate superior risk-adjusted returns for its long-term investors. The fund's Sharpe ratio of 0.16 is ahead of its benchmark and in line with the category average. These factors make it a prominent contender in the category.

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Investment strategy of Invesco India Contra Fund

IICF follows contrarian investment strategy to timely pick fundamentally sound stocks from sectors that are temporarily out of favour or beaten down stocks that are available at a significant discount. The fund managers pick 'neglected stocks' with strong asset values while focusing on under-owned sectors carrying high growth potential. The aim is to have a first mover advantage by investing in these sectors/stocks, therefore increasing the prospects of long term out-performance.

The fund managers utilize a blend of the top-down and bottom-up approach to identify and invest in potentially undervalued stocks across sectors. They believe in incubating such stocks for a while before these stocks find favour with rest of the market.

In terms of asset allocation, the fund is mandated to invest a minimum 65% of its assets in equity and equity related instruments (including derivatives) and maximum 35% can be invested in debt (fixed and floating) and money market instruments. IICF maintains a large-cap bias along with significant allocation to stocks in the mid and small-cap segment. It adjusts the market cap depending on the relative attractiveness of the segment and growth potential.

Graph 2: Top portfolio holdings in Invesco India Contra Fund

IICF usually holds a well-diversified portfolio of 45-55 stocks at any point of time. As on May 31, 2021, IICF held a fairly diversified portfolio of about 49 stocks, with the top 10 stock holdings accounting for around 46.8% of its assets. Highly liquid names like Reliance Industries, ICICI Bank, HDFC Bank, Infosys, Axis Bank, and Reliance Industries currently appear among top holdings in the fund's portfolio. Most of them have been among the core contenders in IICF's portfolio for a long time. SBI, Ultratech Cement, Sun Pharma, L&T, Ashok Leyland, etc. currently stand among the other top holdings in the portfolio.

Infosys, ICICI Bank, HDFC Bank, Reliance Industries, Axis Bank, etc. have been among the top contributors to IICF's performance over the one year. HCL Technologies, Motherson Sumi Systems, Bharat Electronics, Sun Pharma, Tech Mahindra, Ultratech Cement, KNR constructions, among otherswere the other top gainers in the portfolio.

In terms of sector concentration, the top five sectors in IICF's portfolio accounted for over 60% of its assets. The fund held higher weightage to Banking (26.5%) followed by Infotech (13%), Pharma (7.9%), Engineering (6.9%), Finance (6.6%), Petroleum Products (5.7%), and Auto (5.3%). Power, Construction, Cement, Metals, and Auto Ancillaries figure among the other prominent sectors in the fund's portfolio.

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Suitability

IICF is a process-driven fund that holds a superior performance track record that speaks about its ability to create wealth for investors. Over the years, the fund has delivered market beating returns across time periods and market cycles. The fund managers, Mr Taher Badshah and Dhimant Kothari bring immense experience to IICF.

The fund is well-equipped to change as per the market dynamics. While it has the ability to manage downside risk during extreme market conditions, it can gear up and actively participate in the market rallies too. The fund gives high weightage to fundamentals, long-term price momentum and outlook of stocks in its portfolio. This helps it maintain a lead over its peers during uncertain market phases.

As contra funds invest in 'out-of-favour' themes, they may temporarily underperform in the short term, and hence deserve patience. This makes IICF suitable for investors with high-risk tolerance and a time horizon of at least 5 years.

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Note: This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

Author: Divya Grover

This article first appeared on PersonalFN here.

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PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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