In general Contra funds have disappointed investors over a period of time with their below average performances. The first Contra fund in the mutual fund industry in India was launched by SBI Mutual Fund when I used to work there and I managed the fund for several years. Looking at the performance of the fund at that time a number of other AMC’s like Kotak, Tata, Lotus etc launched contra funds which have not done very well. Infact the inspiration for this article came after I looked at the performance of SBI Contra Fund which stands at the bottom of the heap today. The key reason for this non performance has been non adherence to the basic philosophy of a contrarian.
In simple language a Contra Fund will do the following kind of investing
- Stocks that are not fancied by the markets at this point of time, however the under ownership has been carried to such a level that even a little positive news flow can create a significant price movement. Such a trigger could be imminent now over the next few weeks and as such this sector or stock will be bought by the contra fund manager.
- Stocks that have deep value in them at this point of time. The stock might not have performed in the near term due to some adverse news flow, industry/company specific events. However the valuations have come down to such levels that the Contra fund manager will buy and keep a part of the portfolio in such stocks. These stocks might not do well in the near term but will create huge alpha over the longer term.
- Stocks that were bought under category 1 & 2 but have now started outperforming. Since the contra fund manager is a patient fund manager he will not sell early. He has waited for these stocks to start performing and as such the aim will be to capture at least 80% of the up move in these stocks as they are the ones which are driving performance in the near term.
- The Contra fund manager will also do market capitalization contra investing. He will not only buy large caps as they are doing well today and ignore mid caps and vice versa. Whichever category becomes underowned he will invest more in that segment.
- The Contra fund manager will monitor market and trader behaviour, identify bubbles and try to move out of them earlier than others.
Now let’s see if SBI Contra Fund is following this philosophy. If one looks at the portfolio it is clear that this is not happening and this is reflected in the performance of the fund where the current category ranking as per value research are as follows.
| 1 Year | 3 Year | 5 Year | |
| SBI Contra Rank | 53 | 19 | 21 |
| Total No of Funds | 53 | 26 | 21 |
The reasons for this are very clear to see. If we see the holdings of this fund in the Top 10 holdings there are 3 stocks that are from the most fancied sectors of the last one year i.e. Technology and Consumer stocks. Now if these stocks were bought when they were not fancied and were held on under category 3 of stocks as discussed above they should have been sold as of now as the stocks and the sector outperformed the most and this sector has been the most overweight sector of fund managers for some time now.
The fund continued to hold on to its allocation to financials despite the fact that the negatives for the sector had built up significantly after the strong move in the year 2012 and the early part of 2013. This goes against the tenet of a contra fund manager. The contra manager is not bothered about sector allocations in the indices; he is targeting and managing the fund as per a different philosophy which requires that the churn in a contra fund is greater than other funds. This has clearly not happened and the fund manager has worked on a static strategy with improper sector allocations and timing.
The Fund Manager has not changed the portfolio in accordance with the impending event i.e. the elections, falling inflation, the initial groundwork done by the outgoing government in granting clearances to a large number of stalled projects and the possibility of economic revival. The allocation to Capital Goods sector is abnormally low with the highest allocation to Larsen and Toubro at 2.7% of portfolio. There is a time when a segment of the market becomes hugely overvalued and the other hugely undervalued. The Contra FM has to be on the job to monitor these trends to adapt the portfolio.
The FM has made hardly any major overweight allocation to the Automobile stocks where there have been significant triggers in terms of lower input costs, cut in excise duties and low consumer loan interest from banks which are just focussing on consumer loans at this point of time. The contra FM cannot buy the stock or sector which is doing well as on today, he has to be proactive.
I will not take the effort of putting the entire portfolio of the scheme out here but anyone who sees the portfolio will clearly see that the FM is not clear on what he wants to do. The tail of the portfolio has continued to grow with the number of stocks that have an allocation of around 1.5% or below standing at around 20. It seems that the FM starts buying, gets confused or changes his mind but still keeps on holding the marginal allocations. When I used to manage this fund my total holding across the fund used to be 20. The Contra FM has to take bold contrarian calls as per the name of the fund.
The portfolio hardly has any meaningful allocation to mid cap stocks where there is clear value today. As a Contra FM you cannot be a trend follower, you need to set the trend.
In conclusion the entire portfolio of the fund is a hotch potch of stocks. The FM seems to have no clarity on what he wants to do and that is the reason why this fund stands at the bottom of the heap.