Contra Funds take a contrarian view on stocks and sectors that are temporarily going through a tough phase which impacts their performance and allows distortions in valuations. They usually aim to capitalise on these distortions and take contrarian bets to invest in sectors and stocks that are temporarily out of favour and available at a significant discount to their fair valuation.
Fund managers of Contra Fund have strong convictions in the fundamentals of the sectors and stocks they pick for the portfolio and believe they could perform well in the long run.
SBI Contra Fund is an actively managed scheme in the Contra Fund category that has shown a turnaround performance in the last couple of years and currently figures among the top-performing equity funds.
Graph 1: Growth of Rs 10,000 if invested in SBI Contra Fund 5 years ago
Past performance is not an indicator of future returns
Data as on February 01, 2023
(Source: ACE MF)
SBI Contra Fund is a multi-decade-old scheme in the Contra Fund category that is mandated to follow a contrarian strategy by investing in beaten-down stocks and out-of-favour sectors. Accordingly, the fund holds a well-diversified portfolio of fundamentally sound stocks available at a discounted price spread across market caps and sectors. It follows a combination of the top-down and bottom-up approach to pick high-conviction contrarian bets. Notably, the fund lost the attention of investors for a major period due to its sub-par performance, wherein it constantly trailed the benchmark and its peers. Moreover, due to its significant exposure to stocks in the broader market, SBI Contra Fund’s performance derailed completely during the mid and small-cap crash of 2018-19. Nonetheless, SBI Contra Fund has shown a turnaround performance in the last couple of years to find a spot among the top performers in the category. Over the last 5 years, SBI Contra Fund has appreciated at a CAGR of around 13.3%, which is higher than the 10.4% CAGR delivered by its benchmark S&P BSE 500 – TRI index. An investment of Rs 10,000 in SBI Contra Fund five years back would have now appreciated to Rs 18,709 compared to Rs 16,422 for a simultaneous investment in its benchmark.
Table: SBI Contra Fund’s performance vis-á-vis category peers
|SBI Contra Fund
|Kotak India EQ Contra Fund
|Invesco India Contra Fund
|S&P BSE 500 – TRI
Returns are point to point and in %, calculated using the Direct Plan-Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on February 01, 2023
(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.
SBI Contra Fund has shown a turnaround performance in the last couple of years which has helped it to generate a significant lead over the benchmark and category peers. In the last 2-year and 3-year periods, SBI Contra Fund has generated a remarkable lead of around 12 percentage points over the benchmark S&P BSE 500 – TRI and also outpaced its peers. The recent outperformance has helped improve its long-term track record as well. Over the longer period of 5 years and 7 years, SBI Contra Fund has managed to record a significant lead over the benchmark, whereas its performance was nearly in line with the category average.
SBI Contra Fund has also shown improvement in terms of risk-adjusted returns. The fund’s volatility, as denoted by the standard deviation, is slightly higher than the benchmark and its peers. However, the Sharpe Ratio (0.31) of the fund is currently the highest in the category and way ahead of the benchmark, thus well-compensating investors for the level of risk taken.
Investment strategy of SBI Contra Fund
Categorised as Contra Fund, SBI Contra Fund has the mandate to invest a minimum of 65% of its assets in equity and equity-related instruments by following a contrarian investment strategy. The balance can be invested in foreign securities, debt and money market instruments, Rights, Derivatives, units of REITs & InvITs, etc. SBI Contra Fund focuses on companies and sectors that are currently out of favour but have the potential to bounce back and grow in the long run. It looks for temporarily neglected stocks which have strong intrinsic value and fundamental attributes. SBI Contra Fund also focuses on under-owned sectors that are out of favour but have high potential to show a turnaround.
SBI Contra Fund aims to timely identify attractive opportunities across market caps and sectors, to benefit from the turnaround potential of the beaten-down or temporarily neglected stocks and out of favour sectors. It usually holds substantial exposure across the market cap spectrum, viz., large-cap, mid-cap, and small-cap stocks. SBI Contra Fund follows a combination of a ‘top-down’ and ‘bottom-up’ approach to pick stocks within the contrarian investment theme.
Graph 2: Top portfolio holdings in SBI Contra Fund
Holding in (%) as of December 31, 2022
(Source: ACE MF)
SBI Contra Fund usually holds around 55-65 stocks spread across market caps. As of December 31, 2022, SBI Contra Fund held 71 domestic stocks in its portfolio. The fund has restricted the maximum allocation in each stock to under 5%. The top 10 stocks currently account for 26% of its assets consisting of large-cap and mid-cap stocks such as GAIL (India), ICICI Bank, HDFC Bank, Axis Bank, and Power Grid Corporation, among others. SBI Contra Fund usually records a higher turnover of around 120-270%. It also holds exposure of up to 5% in overseas equities and mutual fund units. Among the overseas equities and mutual funds, Alphabet Inc and Invesco QQQ Trust Series I are currently present in SBI Contra Fund’s portfolio.
In the last 2 years, SBI Contra Fund has made the most of the rally in the broader market and has benefited from its holdings in stocks like ICICI Bank, Carborundum Universal, Neogen Chemicals, Axis Bank, Bharti Airtel, The Phoenix Mills, ITC, and Andhra Paper that have together contributed about 16% to its absolute returns in the last 2 years.
SBI Contra Fund’s portfolio is not too concentrated towards any particular set of sectors and is currently diversified across 25 sectors. It has the highest sector exposure in Banks, with an allocation of nearly 14%, along with 8.5% in Finance. Power, Engineering, Oil & Gas, Consumption, Infotech, Auto & Auto Ancillaries, Cement, Pharma, and Construction are among the other prominent sectors in the fund’s portfolio.
SBI Contra Fund has recorded extraordinary performance in the last couple of years, wherein it outpaced the benchmark and its Contra Fund peers by a wide margin. The fund managed to limit the downside risk during the market crash of 2020 compared to the benchmark, while it also stood as the category topper in the ensuing bull phase. Its current fund manager, Mr Dinesh Balachandran, has done well to reverse the fortune of the fund and reward investors with superior gains.
SBI Contra Fund avoids taking concentrated bets on any particular stock or sector. It usually maintains a diversified portfolio of stocks spread across market caps and sectors to benefit from the various opportunities present in the market. Currently, with a higher allocation to non-equity instruments, SBI Contra Fund appears well-placed to stabilise its performance during extreme volatility and capitalise on the buying opportunities in beaten-down stocks in case of a correction.
SBI Contra Fund is suitable for investors seeking an aggressively managed Contra-style fund offering diversification across market caps and having an investment horizon of at least 5-7 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