Invesco India Contra: Betting on beaten-down stocks

The fund scouts for stocks that trade at lower valuations but have good long-term prospects

With valuations of many stocks perched at higher-than-historical levels, the market gyrations in recent times is beating down pricey stocks, especially in the mid- and small-cap space.

Value-oriented funds which look for such beaten-down stocks or those that are trading at lower valuations relative to the sector but have good long-term prospects, make for a good bet at this juncture. Invesco India Contra fits that bill.

The fund scouts for buys across market capitalisations, and hence, follows a multi-cap approach. It has a mandate to show preference for companies which are in a turnaround phase and are trading below their fundamental value.

At the same time, to add a kicker to the returns, the fund can take exposure to growth stocks as well.

Launched in April 2007 when the markets were racing to a peak, Invesco Contra has done well to prove its mettle across the bull, bear and volatile market conditions witnessed in the past few years.

Performance and strategy

It holds at least one-third of its portfolio in mid- and small-cap stocks across market conditions, which helps the fund catch a rally early on.

Its large-cap exposure helps contain downside well at other times, as it did in 2011, 2015 and 2016.

Be it a bull or bear run, the fund does not tweak its asset-allocation markedly.

 

Equity allocations are predominantly at 95 per cent and above in all market conditions.

The fund stays on top through its right stock/sector choices. For instance, while the fund was high on defensive spaces such as software and consumer non-durables in the iffy markets of 2013, it quickly changed colours to latch on to cyclicals such as automobiles in 2014.

It also did well by holding steady in stocks such as Infosys and HCL Technologies and raising stakes in Cyient in 2017 when software stocks were not exactly the darling of the markets.

When the tide turned for IT players in early 2018, the fund was well-placed to benefit from it.

Over one-, three- and five-year periods, the fund has outperformed its benchmark, BSE 500 TRI, by 2-8 percentage points.

In the process, it has done better than peers such as ICICI Prudential Value Discovery and L&T India Value.

While there aren’t too many contrarian picks right now, the choice of stocks display value orientation.

Current portfolio

For instance, even as the cyclical auto and auto ancillary space is doing well right now, the fund has chosen stocks which sport relatively lower valuations, such as Mahindra and Mahindra and Hero MotoCorp, over pricier ones such as Maruti Suzuki.

Even among auto components, in recent months, it has reduced stakes in stocks such as MRF and Exide, whose valuations have inched up sharply.

While it has gone on the defensive by increasing exposure to consumer non-durables in the shaky 2018 market, it has opted for relatively lower-valued ITC and Parag Milk Foods, over richly valued Hindustan Unilever, Dabur and Godrej Consumer Products.

The fund continues to hold about 33 per cent of its equity portfolio in mid- and small-cap stocks, adding Mahanagar Gas and Aditya Birla Fashion and Retail in recent months.

While the fund has cut exposure to banking stocks in 2018, it has added to finance company holdings such as HDFC, Equitas and L&T Finance, and brought in Can Fin Homes afresh.

 

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