Sunday, November 6, 2011

Is it Wise to Invest in Contra Funds Right Now?


Whenever there is any turbulence in the stock markets, talks of Contra funds (Mutual Funds) being a better choice than regular equity diversified mutual funds. Now that the stock market is so volatile, the patrons of Contra Funds have started advising for investment in such funds.
Is it really wise to invest in Contra Funds? This is the question this article is going to answer. So, lets get started!!!

What is a Contra Fund?

A Contra Fund is another type of Equity Mutual fund that has a contrarian view to investment which is supposed to be the opposite of the view that regular MF’s take.
Theoretically speaking, a contra fund is one that invests in stocks that are out of favour with investors and are being sold/avoided by them but have the potential to grow in the long term. A regular MF manager will avoid such stocks while the fund manager of a contra fund will go in search of such stocks.

Do we have Contra Funds in India?

Oh yes, we have. If we didn’t, would I be writing this article?
Anyways, we don’t have as many contra funds as we have in the Equity Diversified and other MF categories. Some of the leading Contra Funds available for us to invest are:
1. ING Contra Fund
2. Kotak Contra Fund
3. L & T Contra Fund
4. SBI Magnum Sector Funds Umbrella – Contra
5. TATA Contra Fund
6. UTI Contra Fund and
7. Religare Contra Fund

How have the Contra Funds Performed in the past few years?

Contrary to popular expectation, the Contra Funds haven’t performed as well as investors would expect. The Category Average Returns of Contra funds has been:
a. In the past 6 months = -16%
b. In the past 1 year = -25%
c. In the past 2 years = -2%
d. In the past 5 years = 4%

If we compare the returns that Equity Diversified Funds have given as a category average, they stand at:
a. In the past 6 months = -14%
b. In the past 1 year = -22%
c. In the past 2 years = 2%
d. In the past 5 years = 7%

As you can see, Regular Equity Diversified Funds, as a whole have outperformed the Contra funds in the past 5 years.

Are these Contra Funds Really Contra in terms of Investment View?

Unfortunately No. If you compare the stocks portfolio of any of these Contra Funds and any of the top Equity Diversified funds you will see that they are similar. Atleast 60% of the stocks that Contra Funds have invested are present in the portfolio if a regular equity diversified fund. Even the Sectors in which these Contra Funds have invested is more or less the same as regular equity diversified funds.

Sector Name Contra Fund - Sector Weightage Regular Fund - Sector Weightage
Financial Services 19% 21%
Energy & Power 14% 15%
Consumer Goods 10% 9%
The weightage in other sectors are comparable too.

Actually speaking, if we pick up the top stocks like ICICI Bank, HDFC Bank, Reliance Industries, Infosys etc, both the Contra Funds and Equity Diversified Funds have invested in them. Almost all of these funds have exposure to such stocks even though, they claim to be following a contrarian investment approach.

Is it a Good Idea to Invest in Contra Funds?

Well, If you ask me, the answer would be “NO”. I believe as a good investor, the next thing that comes up in your mind is – “Why?” If you did think of it, then kudos to you. If you did not, then my friend its time to fire up those brain cells. No matter, who gives any investment advise, it is not a good idea to believe without asking “Why?”

Reason 1: Underperformance
As you may have noticed in the paragraph on the performance of the Contra Funds, you can see that they have underperformed the Regular Equity Diversified Funds consistently over the past 5 years.

Reason 2: Shrinking Fund Corpus
When these Contra Funds were introduced almost a decade ago, they were selling like hot cakes. People invested in them heavily, but seeing their poor performance, most investors have sold their holdings in these funds. Some of these funds had AUM of over 1000 Crores but have come down significantly. The AUM as of November 2011 are:
a. UTI Contra fund – 165 Crores (Was nearly 1200 Crores in 2006)
b. ING Contra Fund – 8 Crores
c. Religare Contra Fund – 66 Crores
d. SBI Magnum Contra Fund – 2900 Crores
e. Kotak Contra fund – 61 Crores (Was nearly 350 Crores in 2006)
f. TATA Contra fund – 97 Crores (Was nearly 200 Crores in 2007)
g. L & T Contra fund – 8 Crores

Note: For the rest of the funds I could not find the historic AUM. But, based on the data for the rest of the funds, you can see that the AUM Corpus has shrunk significantly in these funds and suggests lesser investor confidence

Reason 3: Not much Contrarian Investment Approach

Bottom-line: The Stock Market is volatile and a contrarian investment approach may produce better returns. But, unfortunately the Contra funds available in the Indian MF Market right now are not so Contra and haven’t performed well either. So, it is better to give them a pass and choose top performing Equity Diversified Mutual Funds that have outperformed other classes of MF’s on a regular basis.

Happy Investing!!!

2 comments:

  1. DO u have any example of contra fund perfoming well...interms of portfolio turnover....any particular Example

    ReplyDelete
  2. Tata contra fund is a top performer.

    Note: this is only an example not a buy recommendation

    ReplyDelete

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