Contra funds put up a good show

The two funds in the market have scored over the long term

A few funds follow a contrarian style of investing — picking ‘value stocks’ or sectors that are out of flavour. The general premise is that these stocks will pay off in the long run as the tide turns in their favour. In overheated markets, betting against the trend can play out well. But there are only two funds in the market that currently stick to such an investment mandate. The six or seven funds that were in existence a few years ago (2008-09) have been merged with other schemes of the same fund house.

For instance, in 2014, UTI Contra Fund and UTI Services Industries Fund merged into UTI Multicap Fund.

Now, there are only two funds in this category — Invesco India Contra and SBI Contra. These schemes follow the mandate of identifying potentially undervalued stocks across sectors and then holding on to them until the underlying theme plays out.

In the long term, over three and five-year periods, both Invesco India Contra and SBI Contra have outperformed their respective benchmarks, the BSE 500 and BSE 100 index, respectively. Following an excellent show in 2014 in which Invesco India Contra gained 62 per cent, the scheme continued to do well in subsequent years too, outperforming its benchmark in 2016. But SBI Contra failed to beat its benchmark over the past year.

Sector choices

Financials, auto and energy are currently the top three sectors in Invesco’s portfolio constituting 53 per cent of its portfolio. These are not necessarily out of favour sectors. But software, in which the fund still holds 11 per cent, could be a key contra investing strategy as the sector has been underperforming over the last two years. Infosys is the top preferred stock with 5.4 per cent allocation. Similarly, construction, engineering and communication sectors have been experiencing a tough time. Some stocks in the energy sector show mixed trends. For instance, Coal India and Torrent Power, in which the fund has exposure, are underperforming while GAIL and HPCL are doing well.

The fund started taking exposure in MOIL in October 2015 when the stock was heavily beaten down. Subsequently, during the revival period in early 2016, the fund upped its allocation. The stock has gained 96 per cent in the last one year. JSW Energy and Bharti Airtel are other contrary bets.

SBI Contra also prefers financial services as its top sector choice. But the troubled healthcare and FMCG are also among the top three sectors. The fund does invest in other beaten-down sectors such as software, engineering and construction. Interestingly, the fund has 4.5 per cent exposure in Cognizant Technology.

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