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

SBI Contra Fund is an agile scheme in the Contra Fund category that has seen a remarkable transformation in its performance in recent years, placing it among the top equity funds. It uses diversification to mitigate risk and holds a portfolio diversified across different market caps and sectors.

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

Past performance is not an indicator of future returns
Data as of September 24, 2024
(Source: ACE MF, data collated by PersonalFN) 

Launched in July 1999, SBI Contra Fund follows a contrarian strategy to seek opportunities in undervalued stocks by investing in beaten-down stocks and out-of-favour sectors that have been temporarily overlooked / neglected by investors. SBI Contra Fund usually holds a well-diversified portfolio that includes fundamentally strong stocks available at discounted prices, spanning various market caps and sectors. While the fund tends to frequently adjusts its portfolio, it has demonstrated patience with select high-conviction bets that have ultimately rewarding investors over time.

It’s important to note that SBI Contra Fund experienced a long phase of low investor interest due to its poor performance in the past, wherein it consistently lagging its benchmark and peers. Its substantial exposure to broader market stocks contributed to a significant decline during the mid and small-cap crash of 2018-19. However, the fund has rebounded strongly in recent years, positioning itself among the top performers in its category as well as among diversified equity funds. During the market crash of 2020, SBI Contra Fund effectively reduced downside risk compared to the benchmark and has also emerged as the leading fund in the ongoing bull market.

Over the past five years, SBI Contra Fund has grown at a CAGR of about 32.3%, significantly outpacing the 22.2% CAGR of its benchmark, the S&P BSE 500 – TRI index. An investment of Rs 10,000 in SBI Contra Fund five years ago would now have increased to Rs 40,549, while the same amount invested simultaneously in its benchmark would have reached Rs 27,249. Driven by this impressive performance, the fund has gained investor interest, with its corpus approaching Rs 40,000 crore, having more than doubled in the last one year.

How has SBI 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	39,433	42.55	30.43	32.23	27.57	19.98	12.63	0.49
Kotak India EQ Contra Fund	3,929	43.65	27.45	25.08	22.19	19.65	14.28	0.37
Invesco India Contra Fund	17,817	38.37	23.18	22.21	20.80	18.46	14.22	0.35
BSE 500 – TRI		31.09	18.85	19.61	18.50	15.79	14.17	0.25

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 September 24, 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.

After experiencing a period of sub-par growth between 2018 and 2019, SBI Contra Fund has shown remarkable performance in recent years, consistently outperforming both the benchmark and its category peers to generate substantial alpha. Under the leadership of its current fund manager, Mr. Dinesh Balachandran, the fund has successfully turned its fortunes around, providing superior returns to its investors. On a rolling return basis, over the last 1-year, 2-year, and 3-year periods, SBI Contra Fund has achieved an impressive lead of approximately 11.5-12.5 percentage points over the benchmark S&P BSE 500 – TRI, significantly surpassing its peers as well. This recent outperformance has contributed to an improved long-term track record. Over the longer periods of 5 years and 7 years, the fund has maintained a considerable lead over the benchmark and demonstrated superior performance against its peers.

SBI Contra Fund has also made notable strides in terms of risk-adjusted returns. The fund’s volatility, indicated by the standard deviation, is lower than that of the benchmark and its peers. Additionally, the Sharpe Ratio (0.49) of the fund is currently the highest in its category, significantly outpacing the benchmark. The fund has effectively rewarded investors for the level of risk they have undertaken.

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

What is the investment strategy of SBI Contra Fund?

Categorised as a 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. The fund focuses on investing in 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 temporarily out of favour and possess significant potential for a positive reversal.

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. The fund follows a combination of a ‘top-down’ and ‘bottom-up’ approach to pick stocks within the contrarian investment theme.

What are the top portfolio holdings in SBI Contra Fund?

Holding in (%) as of August 31, 2024
(Source: ACE MF, data collated by PersonalFN) 

SBI Contra Fund usually holds a well-diversified portfolio of around 80-90 stocks spread across market caps. As of August 31, 2024, the fund held 90 domestic stocks in its portfolio and restricted the maximum allocation in each stock to around 5%. The top 10 stocks currently account for 25.5% of its assets comprising large-cap and mid-cap stocks such as HDFC Bank, GAIL (India), Tech Mahindra, Kotak Mahindra Bank, and Indus Towers. Following an active management approach, the fund usually records a higher turnover of around 150- 230%, signifying frequent adjustments to the portfolio. SBI Contra Fund also held an allocation of 2.7% in overseas equities having invested in Cognizant Technology Solutions Corporation and EPAM Systems Inc.

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 GAIL (India), CESC, and NHPC, that have contributed immensely to its returns. Torrent Power, ICICI Bank, United Spirits, Lupin, Disa India, SBI, Ashiana Housing, ITC, Wendt India, V-Guard Industries, and Mahindra & Mahindra Financial Services stood among the other top gainers in the portfolio.

SBI Contra Fund’s portfolio exhibits a well-diversified approach, and it is currently spread across over 25 sectors without being excessively concentrated in any particular set of sectors. The fund’s highest sector exposure is in Banks with an allocation of around 14.5%, along with 3.7% in Finance. This is followed by Infotech, Pharma, Oil & Gas, Consumption, Auto, and Power that are among the other prominent sectors in the fund’s portfolio.

Is SBI Contra Fund suitable for my investment goals and risk tolerance?

SBI Contra Fund has delivered exceptional performance in recent years, significantly outperforming its benchmark and peers in the Contra Fund category. Additionally, the fund has managed volatility well, achieving strong risk-adjusted returns as reflected in its impressive Sharpe ratio. Benefiting from the broad market rally since the March 2020 crash, the fund has garnered considerable investor attention, resulting in its corpus growing more than six-fold over the past two years.

With its higher allocation to mid-cap and small-cap stocks, SBI Contra Fund can generate significant returns in favourable market conditions and rallies dominated by mid and small caps. However, this also means greater portfolio volatility during challenging market phases when mid and small caps are under pressure. Nonetheless, the fund’s active management approach enables swift liquidation of securities during volatile periods, offering a strategic edge. Moreover, it avoids concentrating heavily on specific stocks or sectors, which can help in managing risks effectively.

SBI Contra Fund is suitable for investors looking for an aggressively managed Contra Fund with a multi-cap strategy and have an investment horizon of at least 5-7 years.

Which this video to find out which among ULIPs and Mutual Funds is the better investment option for your financial goals:

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