The turbulence in the domestic markets continues due to global cues and intrinsic issues. Any turbulence in the markets leads to shift the focus towards Contra Funds (Mutual Funds) vis-à-vis regular diversified equity mutual funds. Amidst volatility, the patrons of the Contra funds have once again started advising them to the investor community. They were the star performers in 2008-09 crisis primarily because of their ability to contain downside and decent magnitude of upsurge.
What is a Contra Fund?
Contra, short form of contrarian, focuses on stocks or sectors which are beaten down owing to intrinsic reasons. However, there is nothing wrong with the industry and they have a potential to bounce back in the future. Contra Funds invest in these out of favor stocks for their intrinsic growth potential which the current price may not reflect. The aim of these funds is to gain form the price advantage by investing in these stocks.
Indian Contra Funds
As of now, 6 AMCs have launched the contra funds in their funds basket. Almost all the major fund houses like SBI, Tata, Kotak and UTI have contra funds offerings. SBI launched the first contra funds in India, way back in July 1999. Following table lists out the contra funds currently operational in India with their respective “Expense Ratios”.
As can be seen from the above list, the expense ratios of these funds are on the higher side and barring two, rest 4 are hovering around 2.50%. The best bet in terms of expense ratio is UTI contra with 1.64%. The question which comes to my mind after seeing these whopping expense charges is that if these funds are outperforming key benchmarks and by what magnitude.
Although another school of thought is that contrarian investing is not an instinctive reaction in volatile markets. The purchases are made during widespread carnage, contrarian investing relies on in-depth research to source out greatly mispriced stocks and the foresight to look beyond the short-term volatility.
Although another school of thought is that contrarian investing is not an instinctive reaction in volatile markets. The purchases are made during widespread carnage, contrarian investing relies on in-depth research to source out greatly mispriced stocks and the foresight to look beyond the short-term volatility.
Performance Review
The next research is on analyzing the returns of these funds for the last 5 calendar years with respect to the key benchmark indices, Sensex and Nifty. The following table highlights the performance of the 6 funds on various timelines.
Green: Outperformance of fund w.r.t both Sensex and Nifty.
Red: Underperformance of fund w.r.t both Sensex and Nifty.
YTD: Year-to-Date
i) L&T contra has been a consistent underperformer on all timelines except the YTD returns.
ii) Tata contra has been able to outperform both the key indices in the last 4 iterations.
ii) Tata contra has been able to outperform both the key indices in the last 4 iterations.
iii) 2010 was the worst year for contra funds and only exception was Tata contra which managed to outperform Sensex and Nifty.
iv) It has been a decent year so far for the contra funds; with 5 out of 6 funds have outperformed the benchmarks, although not by a huge magnitude.
On “Average Assets under Management” terms, the oldest contra fund SBI contra has the corpus of 2702 crores which account for almost 88% of the contra funds basket. L&T is a minnow in the asset race with just 8 crores in its kitty and it has to work hard to compete with even second last player in this category. The total AUM of the contra funds basket stands at 3082 Crs. as on 31-Mar-12and it constitutes just 1.69% of the total equity funds AUM (182076 Crs.) as on 31-Mar-12.
Before reaching to any conclusion on industry picks, let us analyze the top 5 company picks for all the 6 funds.
iv) It has been a decent year so far for the contra funds; with 5 out of 6 funds have outperformed the benchmarks, although not by a huge magnitude.
v) On an average basis, contra funds have been able to outscore benchmarks on just 2 occasions, namely, 2009 and on YTD basis this year.
AAUM’s in Crores: (as on 31-March-12)
On “Average Assets under Management” terms, the oldest contra fund SBI contra has the corpus of 2702 crores which account for almost 88% of the contra funds basket. L&T is a minnow in the asset race with just 8 crores in its kitty and it has to work hard to compete with even second last player in this category. The total AUM of the contra funds basket stands at 3082 Crs. as on 31-Mar-12and it constitutes just 1.69% of the total equity funds AUM (182076 Crs.) as on 31-Mar-12.
Top 3 Industry Concentrations: May-31-2012
The above stats about the top 3 industry concentration reveals that “Financial” as an industry is the top pick for all the 6 contra funds. Energy is the second most favorite industry for 5 out of 6 contra funds. The third slot is being occupied by FMCG, Energy or Tech industry.
Before reaching to any conclusion on industry picks, let us analyze the top 5 company picks for all the 6 funds.
Top 5 Holdings: May-31-2012
On analyzing the top 5 holdings data, the stocks chosen are mostly blue-chips or stalwarts that have become out of favor due to reasons either intrinsic to them or on a broader note, to the industry itself.
The banks on the whole have been on the receiving side due to the central banks anti-inflationary stance. Moreover as an industry, it is not really out of favor because of the immense potential offered by it and also because of the robust banking system prevailing in India.
The energy industry again offers tremendous potential in the country as most of the Indian states are reeling under acute power shortage. This industry is also facing the music of so called policy paralysis affecting the industry as whole.
The stock picking strategy reveals that fund managers are not staunchly following a contra style of investing, but it also has an element of value investing in it. This is purely because the top 5 highlighted here are not sufferers by any means and on the contrary they are market favorites and are frequently found in any large-cap diversified equity fund.
Apart from the blue-chips, the other contra bets such as GSFC and Sadbhav Engg. (Not so famous names) but they are far and few in between.
Conclusion:
After a thorough evaluation, it is now a revelation that almost all the contra funds are employing a value investing approach. The top picks are in line to the diversified equity fund following a large-cap bias or a value based style.
The high expense ratio for such a value picking strategy is not justified and as it is the returns are also not outperforming the major benchmarks by any means.
The contra fund name is just a fancy to allure the investor and any diversified equity funds with a large or large to mid-cap bias with a good track record and from an acclaimed AMC sounds a much better alternative.
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