Welcome to  PersonalFN’s weekly analysis on diversified equity mutual funds! In this issue, we have analysed Kotak India EQ Contra Fund, highlighting its performance, peer comparison, investment strategy, fundamentals, portfolio, and suitability.

Kotak India EQ Contra Fund is a prudently managed Contra-style fund that has demonstrated commendable performance across market phases in comparison to the benchmark and delivered favourable risk-adjusted returns to its investors. It utilises a mix of fundamental outlook and quantitative models to select stocks.

What is the growth of Rs 10,000 invested in Kotak India EQ Contra Fund five years ago?

Past performance is not an indicator of future returns
Data as of June 04, 2024
(Source: ACE MF, data collated by PersonalFN) 

Launched in July 2005, Kotak India EQ Contra Fund is a contra-style fund that leverages both fundamental analysis and quantitative model to make high-conviction investment decisions. It typically looks for high-potential stocks that are undervalued and balances out the emotional quotient of the fund manager through the quant model. With a small-sized AUM of Rs 2,962 crore, Kotak India EQ Contra Fund is yet to grab the attention of investors. Notably, despite having a history of nearly 19 years, the fund struggled constantly to make a mark in its performance that could help it become investors’ choice and usually delivered mediocre performance.

Nevertheless, over the last few years, Kotak India EQ Contra Fund has made the best use of the available opportunities, beating the benchmark and its category peers by a noticeable margin. It came to the limelight after delivering superior performance during the mid and small-cap correction in CY 2018-2019. Notably, its bias towards large-cap index heavyweights turned in its favour during the market correction that was driven by a sharp fall in the mid and small-cap segments. Moreover, during the market crash of 2020, the fund managed to limit the downside risk more efficiently compared to the benchmark Nifty 500 – TRI index, while it has also managed to maintain a lead over the benchmark index in the current bull phase.

Over the last 5-year period, Kotak India EQ Contra Fund has grown at a compounded annualised rate of about 21%, as against 16.8% CAGR delivered by its benchmark Nifty 500 – TRI index, thus generating an alpha of around 4 percentage points in CAGR. An investment of Rs 10,000 in Kotak India EQ Contra Fund five years back would have now appreciated to Rs 25,931 compared to a valuation of Rs 21,735 for a simultaneous investment in its benchmark. The fund’s recent outperformance, along with the ability to manage the downside, helped it stand strong in the Contra Fund category.

How has Kotak India EQ Contra Fund performed on a rolling return basis?

Scheme Name Corpus (Cr.) 1 Year 2 Year 3 Year 5 Year 7 Year Std Dev Sharpe
SBI Contra Fund 29,586 36.87 25.57 35.50 23.84 18.77 12.95 0.49
Kotak India EQ Contra Fund 2,962 34.19 19.85 25.44 18.97 18.42 14.05 0.38
Invesco India Contra Fund 14,713 28.70 16.28 22.50 17.52 17.46 13.87 0.32
Nifty 500 – TRI 25.00 13.82 21.35 15.94 15.05 14.24 0.26

The securities quoted are for illustration only and are not recommendatory.
Returns are on a rolling basis and in %. Direct Plan-Growth option. Those depicted over 1-Yr are compounded annualised. Risk ratios are calculated over a 3-year period assuming a risk-free rate of 6% p.a.
Data as of June 04, 2024
(Source: ACE MF, data collated by PersonalFN)
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 before investing. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.

Kotak India EQ Contra Fund typically invests with a medium to long-term view which allows its contrarian opportunities adequate time to pay off. While the fund has occasionally struggled to maintain a remarkable lead over the benchmark and its peers in the past, it has proven its ability to generate market-beating returns over the long run. With an impressive track record in recent years, Kotak India EQ Contra Fund has outperformed its benchmark, Nifty 500 – TRI, across different time frames.

On a rolling return basis, over the last 1-year to 3-year periods, Kotak India EQ Contra Fund has generated an alpha of around 4-9 percentage points over the benchmark. Even over the longer time frames of 5 years and 7 years, Kotak India EQ Contra Fund has maintained a decent lead of around 3 percentage points and has also stood strong beside its peers.

This outperformance has come at a reasonable risk. The fund’s Standard Deviation (14.08%, annualised) is marginally lower than its benchmark (14.30%, annualised) though slightly higher than the category average (13.68%, annualised). In terms of risk-adjusted returns, as denoted by the Sharpe ratio, Kotak India EQ Contra Fund has outperformed its benchmark by a decent margin.

What is the investment strategy of Kotak India EQ Contra Fund?

Categorised under Contra-style funds, Kotak India EQ Contra Fund is mandated to follow a contrarian investment strategy and maintain a minimum of 65% of its portfolio in equities. While constructing its portfolio, the fund follows a smart Quantamental approach to portfolio construction. Kotak India EQ Contra Fund defines the Quantamental approach as a blend of IQ and EQ (a mix of quant and fundamental analysis).

It uses IQ to form a fundamental outlook on stocks shortlisted from the investment universe through a mix of the ‘Top-down’ and ‘Bottom-up’ approach to stock picking. Within the fundamental outlook, the fund gives weightage to Business quality, Promoter, Sector, Moat, and Competition and also looks at GARP (Growth at a Reasonable Price). It uses EQ for Quantitative analysis of stocks considering parameters like Earnings, ROE, Value, Quality, Risk, Liquidity, Cash, etc.

The fund holds a high conviction overweight / underweight position on stocks and sectors which are in sync and the IQ is equal to EQ. For stocks / sectors that are not in sync or the IQ is not equal to EQ, it further dissects and analyses the stock for decision making. Accordingly, Kotak India EQ Contra Fund maintains a balance between IQ and EQ to take non-consensus and high-conviction calls. It usually maintains a large-cap biased portfolio along with substantial exposure to mid-cap and small-cap stocks.

[Read: Contra Funds: Are They Right for You?]

What are the top portfolio holdings in Kotak India EQ Contra Fund?

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Holding in (%) as of April 30, 2024
(Source: ACE MF, data collated by PersonalFN) 

Kotak India EQ Contra Fund usually holds a well-diversified portfolio of about 60 to 65 stocks. As of April 30, 2024, the fund held 65 stocks in its portfolio reasonably diversified across sectors. The top 10 holdings accounted for about 30.5% of the portfolio. Large-cap index heavyweights such as ICICI Bank, HDFC Bank, and Reliance Industries currently find a place among top holdings in the portfolio. Infosys, SBI, NTPC, Bharti Airtel, and Exide Industries are among other prominent holdings with exposure in the range of 2% to 3% each.

Notably, Kotak India EQ Contra Fund has restricted allocation in individual stocks to 5% or under. The fund usually follows a buy-and-hold investment strategy to derive the full potential of stocks in its portfolio.

Kotak India EQ Contra Fund’s bet on Cummins India, ICICI Bank, L&T, Bharat Electronics, SBI, Bharti Airtel, and NTPC turned out to be rewarding in the last 2 years. It has also benefited from its holding in Axis Bank, Sun Pharma, ITC, Maruti Suzuki India, Ultratech Cement, Jindal Steel & Power, Bharat Forge, and Interglobe Aviation, among others.

Among sector holdings, Kotak India EQ Contra Fund’s current portfolio is majorly exposed to Banking and Finance having a combined allocation of about 25.9%, followed by Auto & Auto Ancillaries, Consumption, Infotech, Engineering, and Pharma. Additionally, Power, Oil & Gas, and Petroleum are the other prominent sectors in the portfolio. The top 5 sectors in Kotak India EQ Contra Fund’s portfolio together account for about 49% of its assets. While the fund’s portfolio has higher exposure to cyclicals, it holds fair diversification to defensives.

Is Kotak India EQ Contra Fund suitable for my investment goals and risk tolerance?

With well-defined investment systems and processes in place, Kotak India EQ Contra Fund possesses the capability to selectively identify overlooked yet fundamentally sound companies, predominantly in the large-cap and mid-cap segments. The fund’s risk-conscious approach ensures it refrains from making aggressive bets for the sake of extraordinary gains. Instead, it focuses on out-of-favour but fundamentally sound stocks and sectors. With this, Kotak India EQ Contra Fund has managed to generate market-beating returns in the long run.

Kotak India EQ Contra Fund has consistently maintained a commendable lead over its benchmark in various bull and bear market phases, albeit occasionally trailing the category average in shorter time frames. The superior stock-picking strategy has helped Kotak India EQ Contra Fund timely add fundamentally sound stocks picked at reasonable valuations and outscore the benchmark across time periods. The fund management typically invests in stocks trading below their intrinsic value and gives them adequate time to realise their full potential. Moreover, the fund has been agile enough to take advantage of various investment opportunities present across stocks and sectors and has a very positive outlook.

Kotak India EQ Contra Fund is suitable for investors having a preference for a relatively stable contra-style fund with 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. Registration granted by SEBI, Membership of BASL and certification from NISM no way guarantee performance of the intermediary or provide any assurance of returns to investors.

This article first appeared on PersonalFN here

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