Contra Funds can be a good bet to diversify the portfolio. As the name suggests, these funds take a contrarian view on stocks and sectors going through a temporary tough phase. Often investors tend to avoid stocks/sectors that may be inappropriately priced in the short run due to fear of losing out. However, some of these stocks/sectors may grow to reflect its true value and reward investors for their patience in the long run.
The fund managers of Contra Funds aim to identify such high conviction stocks and sectors that they believe could perform well in the long run despite short-term distortion in their valuations. During uncertain and volatile conditions such as the one we are witnessing now, the category may hold lower risk because many stocks are already out of favour and thus, the margin of safety is high.
Invesco India Contra Fund is a Contra Fund known for its ability to realise the full potential of its contrarian stock picks, that has helped generate reasonable risk-adjusted returns and create significant wealth for its investors in the long run.
Graph 1: Growth of Rs 10,000 if invested in Invesco India Contra Fund 5 years ago
Data as on February 09, 2022
(Source: ACE MF)
Invesco India Contra Fund has a proven track record of benefiting from timely contrarian bets by investing in stocks and sectors that are temporarily out of favour and available at a significant discount to their fair valuation. Incepted in April 2007, Invesco India Contra Fund remained unnoticed for almost 10 years. However, its spectacular performance over the last few years helped it gain the attention of investors and aided the growth in its AUM to over Rs 8,500 crore mark. An investment of Rs 10,000 made in Invesco India Contra Fund 5 years back would have appreciated by about 18.2% CAGR to Rs 23,097 compared to a CAGR of 16.1% for a simultaneous investment in its benchmark. Though Invesco India Contra Fund has trailed the benchmark and the category average in the current bull phase, it has the ability to reward investors well across complete market cycles. As Contra Funds invest in ‘out-of-favour’ themes, they may temporarily underperform in the short term and hence deserve patience.
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||Std Dev||Sharpe|
|SBI Contra Fund||3,774||36.05||38.95||26.86||17.43||13.55||23.86||0.27|
|Invesco India Contra Fund||8,560||21.89||24.50||21.36||18.21||15.75||22.06||0.23|
|Kotak India EQ Contra Fund||1,236||21.16||23.59||20.49||18.39||14.75||21.82||0.23|
|S&P BSE 500 – TRI||22.14||24.11||19.97||16.05||13.15||22.08||0.22|
Returns are point to point and in %, calculated using Direct Plan – Growth Option. Those depicted over 1-Yr are compounded annualised.
Data as on February 09, 2022
(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 of future returns. The percentage returns shown are only for indicative purposes.
Invesco India Contra Fund has time and again maintained its spot as a top contender in the Contra Funds category. It has distinctly outperformed the benchmark S&P BSE 500 – TRI across most time periods in the past. Notably, Invesco India Contra Fund has trailed the benchmark and the category average in the last one and a half year which has impacted its performance over the medium term. However, the fund’s returns over longer time periods of 3-years, 5-years, and 7-years have been remarkable, where it has managed to generate an alpha of around 1-3.5 percentage points.
Invesco India Contra Fund has shown volatility nearly in line with the benchmark and has been effective in generating superior risk-adjusted returns for its long-term investors. The fund’s Sharpe ratio of 0.23 is ahead of the benchmark, thus making it a prominent contender in the category.
Investment strategy of Invesco India Contra Fund
Invesco India Contra Fund follows a contrarian strategy where the fund managers pick ‘neglected stocks’ with strong asset values while focusing on under-owned sectors carrying high potential. The aim is to have a first-mover advantage by investing in out of favour sectors/stocks, thus increasing performance prospects. In terms of asset allocation, the fund is mandated to invest a minimum of 65% of its assets in equity and equity-related instruments, and a maximum of 35% can be invested in debt and money market instruments.
While managing Invesco India Contra Fund, the fund managers focus on undervalued stocks trading at a significant discount to their fair valuation with an aim to hold them in the portfolio until their intrinsic value is achieved. Accordingly, the fund managers identify and invest in potentially undervalued stocks across sectors utilizing both the top-down and bottom-up approach and believe in incubating such stocks for a while before they find favour with the rest of the market.
The fund managers also try to proactively identify new investment themes. It also examines the relative attractiveness of mid-caps and large caps and adjusts the market cap of the portfolio towards higher return potential. While the fund managers constantly hunt for stocks available at cheap valuations and look at timely entry and exit, moderate churning in Invesco India Contra Fund’s portfolio cannot be ruled out.
Graph 2: Top portfolio holdings in Invesco India Contra Fund
Holding in (%) as of January 31, 2022
(Source: ACE MF)
Invesco India Contra Fund usually holds a well-diversified portfolio of 45-55 stocks at any point of time. As of January 31, 2022, the fund held 52 stocks in its portfolio, with the top 10 stock holdings accounting for nearly 48.1% of its assets. Highly liquid names like ICICI Bank, HDFC Bank, and Infosys currently appear among the top holdings in the fund’s portfolio. SBI, L&T, Reliance Industries, Ultratech Cement, etc. currently stand among the other top holdings in the portfolio. Most of them have been among the core contenders in the fund’s portfolio for a long time.
ICICI Bank, Infosys, Reliance Industries, KEI Industries, L&T, Bharat Electronics, Tech Mahindra, and Ultratech Cement were among the stocks that turned out to be the top contributors to Invesco India Contra Fund’s performance in the last one year. However, it lost some value in stocks such as, Aurobindo Pharma, Rallis India, and Mishra Dhatu Nigam.
In terms of sector concentration, the top five sectors in Invesco India Contra Fund’s portfolio accounted for nearly 60% of its assets. The fund held higher weightage to Banking & Finance stocks together accounting for 31.9% of its assets, followed by Infotech (11.6%), Engineering (8.9%), Auto (7.3%), and Pharma (6.1%). Consumption, Cement, Power, and Petroleum are among the other prominent sectors in the fund’s portfolio.
Invesco India Contra Fund is a process-driven fund that holds a superior performance track record that speaks about its ability to create wealth for investors. The fund managers, Mr Taher Badshah and Dhimant Kothari bring immense experience to the fund. With this, Invesco India Contra Fund has delivered market-beating returns across time periods and market cycles.
The fund is well-equipped to capitalise on various market opportunities. While Invesco India Contra Fund 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 mentioned earlier, contra funds invest in ‘out-of-favour’ themes, and therefore they may temporarily underperform in the short term. This makes Invesco India Contra Fund suitable for investors with high risk tolerance and a time horizon of at least 5 years.
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.
This article first appeared on PersonalFN here