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Do contra funds really follow contrarian bets? - Outside View by PersonalFN
Do contra funds really follow contrarian bets?

The Indian mutual fund industry is flooded with more than 800 equity oriented mutual fund schemes. Financial innovation led by financial exuberance has been rampant across the financial markets - globally, which has also led to fund managers think differently / innovatively. It has resulted in creation of new products as well as new approaches to fund management.

Contrarian investing is one such investment approach which has taken its shape over the years. Under contra investing, the fund manager focuses on investing against the prevailing market trend in assets that are performing poorly, and selling them when they perform well. The approach hubs on identifying neglected stocks that are undervalued today (trading at lower P/E multiple or P/BV), but have a potential of growing in the long-term. Hence broadly if we observe, contra investing is a subset of value investing. But a noteworthy point is that contra investing is far more complex than value investing, as the objective is picking stocks which are dumped by the market (available at a cheap price) in the short-term, but nonetheless have the potential to gain in the long-term when the market recognises its true potential. Hence by doing so, contra investing aims at sailing against the tide by betting on "out of favour"stocks / sectors, in an attempt to gain in the long-term. However the question remains - has this style of investing created enough wealth for you investors, while you got swayed by the exuberance created by the marketers of contra funds?

The Indian mutual witnessed the launch of its first contra funds way back in the year 1999, with the launch of SBI Magnum Contra Fund - Dividend Option (in July 1999), and thereafter we have witnessed several contra funds (including the "growth option"in SBI Magnum Contra Fund) being launched as other fund houses were enthused by stunning returns delivered by the pioneer - SBI Magnum Contra (Dividend Option).

Making hay when the sun shines
Name of mutual fund scheme Inception date BSE Sensex Price/Earnings of BSE Sensex Price/Book Value of BSE Sensex
SBI Magnum Contra Fund (G) May 6, 2005 6,388.48 14.86 3.68
Kotak Contra Fund (G) July 27, 2005 7,605.03 16.07 4.15
Tata Contra Fund (G) November 22, 2005 8,534.97 16.76 4.08
ING Contra Fund (G) March 10, 2006 10,765.16 19.77 4.85
L&T Contra Fund (G) March 16, 2006 10,878.74 20.05 4.93
UTI Contra Fund (G) April 18, 2006 11,821.57 21.54 5.34
Religare Contra Fund (G) April 12, 2007 13,113.81 20.40 5.09
JM Contra (G)* September 7, 2007 15,590.42 21.05 5.01
*Merged with Multi Strategy Fund w.e.f. April 1, 2011
P/E and P/B of BSE Sensex as on
(Source: ACE MF, BSE website, PersonalFN Research)

But interestingly, if you observe most fund houses barring SBI Mutual Fund launched their contra funds when the Indian equity markets were on an upswing (in the year 2005 to 2007) and when there was less room for contra investing.

Well, you may be wondering what made them launch these contra funds when the markets were on an uptrend. The answer to that is very simple! It was their thirst to garner more Assets Under Management (AUM) by capitalising on positive investor sentiments.

How Contra Funds have fared?
Scheme Name 6-Mth (%) 1-Yr (%) 3-Yr (%) 5-Yr (%) Since Inception (%) Std. Dev (%) Sharpe Ratio Top 10 stocks (%) Portfolio Turnover Ratio (%) Expense Ratio (%)
Religare Contra (G) -5.0 1.6 20.3 - 11.7 9.00 0.06 47.1 101.00 2.50
Tata Contra (G) -4.3 11.0 16.9 13.1 10.8 9.35 0.07 50.2 20.00 2.48
ING Contra (G) -7.4 -1.9 12.8 14.2 8.8 10.41 0.00 44.8 56.52 2.50
Kotak Contra (G) -10.5 -3.3 12.7 12.1 12.5 8.27 0.14 45.9 204.81 2.50
UTI Contra (G) -11.3 -4.9 12.0 9.8 5.1 7.71 0.05 47.6 18.79 1.80
SBI Magnum Contra (G) -8.5 -2.9 11.2 14.3 21.6 9.21 0.05 42.0 50.00 1.85
SBI Magnum Contra (D) -8.5 -2.9 11.2 14.3 24.5 9.21 0.05 42.0 50.00 1.85
L&T Contra (G) -9.7 1.4 3.4 2.4 0.0 10.38 0.06 48.6 53.00 2.50
Category Average* -8.1 -0.2 12.6 11.4 11.9 9.19 0.06 - - -
BSE-100 -7.7 2.8 10.0 13.3 - 9.88 0.04 - - -
BSE-200 -8.2 2.0 10.4 13.3 - 10.00 0.04 - - -
BSE-500 -8.3 1.5 10.0 13.0 - 10.13 0.04 - - -
S&P CNX 500 -8.0 1.7 10.5 12.6 - 9.87 0.04 - - -
NAV data is as on June 27, 2011. Standard Deviation and Sharpe ratio is calculated over a 3-Yr period. Risk-free rate is assumed to be 6.37%)
*Note1: Category average has been calculated taking the "simple average" of all the funds.
(Source: ACE MF, PersonalFN Research)

And while they did achieve success in garnering more AUM, they haven't achieved much success in generating wealth for their investors. In fact in the last one year the returns they have provided dismaying returns despite a surge in the Indian equity markets.

When seen over a 3-Yr time frame, barring a couple of funds (like Religare Contra Fund and Tata Contra Fund) they have not delivered much appealing returns to their investors. In fact on an inflation-adjusted basis barring Religare Contra Fund and Tata Contra Fund, most have failed to create startling wealth for their investors. However, for SBI Contra Fund (Dividend Option) the since inception returns have been quite appealing due to the longer history and market cycles experienced by the fund.

Performance across market cycles
Schemes / Index Bull Bear Bull
01-Aug-05 to 09-Jan-08 to 09-Mar-09 to
09-Jan-08 09-Mar-09 07-June-11
Religare Contra (G)* 61.13 -50.66 49.56
Tata Contra (G)* 31.17 -56.64 51.99
ING Contra (G)* 33.95 -55.79 45.27
Kotak Contra (G) 38.03 -51.73 37.10
UTI Contra (G)* 19.11 -46.39 32.64
SBI Magnum Contra (G) 59.44 -53.21 38.80
SBI Magnum Contra (D) 59.48 -53.21 38.81
L&T Contra (G)* 28.46 -65.73 40.06
BSE-100 52.45 -58.08 43.99
BSE-200 51.65 -59.00 45.24
BSE-500 52.31 -60.43 46.08
S&P CNX 500 49.60 -58.34 42.44
* Returns in these funds for the 1st bull cycle is calculated from their respective inception date till 09-Jan-08
(Source: ACE MF, PersonalFN Research)

Moreover, while most funds which experienced the powerful bull phase of 2005 to 2008, did manage to appeal investors by performing well by even managing the downside of the Indian equity markets in 2008 to 2009; in the second bull phase (i.e from 2009 till date) some of them are still lagging on the returns when compared to respective benchmark indices.

As far as their risk characteristic is concerned, they have exposed their investors to low-to-high risk (as revealed by their standard deviation) compared to their respective benchmark indices. But that's typically is a result of the style of investing which they have followed. Moreover, the risk-adjusted returns (as displayed by the Sharpe Ratio) have been quite disappointing except for SBI Magnum Contra Fund and Kotak Contra Fund.

Portfolio Characteristics and strategy:

Generally to build-up a portfolio, (as mentioned earlier) contra funds invest in stocks / sectors which are "out of favour"and bet against the market trends or favourite stocks in the market, thereby considering stocks which are neglected, dumped and undervalued by the market in the short-term.

Top 10 sectors
Top 10 Stocks
Name of the company Market cap % of holding*
HDFC Bank Ltd. Large cap 5.5
Reliance Industries Ltd. Large cap 4.9
Bharti Airtel Ltd. Large cap 4.5
ICICI Bank Ltd. Large cap 3.6
ITC Ltd. Large cap 3.2
Tata Consultancy Services Ltd. Large cap 2.7
Infosys Ltd. Large cap 2.6
Sadbhav Engineering Ltd. Small cap 2.6
Exide Industries Ltd. Mid cap 2.2
Hindustan Zinc Ltd. Large cap 2.2

But interestingly an analysis of their portfolio reveals that they aren't purely following a contra style of investing - in fact they have an element of value investing. This is because 80% of their top-10 stocks, aren't really those which are out of favour or mostly dumped by the market. In fact, they are the market favourites and found in any diversified equity oriented fund following a large cap bias or a value style.

Even the top-sectors followed by contra funds aren't really those which are out of favour. They have capitalised on relatively lower valuations of the equity markets in the past to buy stocks for their portfolio. For the instance the aforementioned chart reveals that most contra funds have taken the opportunity of cheap valuations in the banking sector, occurred due to Reserve Bank of India's (RBI's) anti-inflation stance maintained since March 2010. Moreover as a sector if we go to observe, it isn't really out of favour because of strong growth potential offered by it and robust banking regulation followed by our country.

The verdict:

The failure of contra funds to stick to their investment mandate should be a matter of concern for all you investor, who simply get swayed by fancy presentations and the exuberance created by the market intermediaries, pink papers and business channels. We believe that why should you flock onto mutual fund schemes which just merely have fancy names but do not have unique portfolio in accordance to their set investment mandate.

In our opinion since contra investing is a subset of value investing and has exhaustive principles to undertake stock picking activity, we believe holding some good value funds instead would do good to your portfolio.

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

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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