The idea is to be different – by betting on stocks or sectors being beaten down. But six schemes which follow the contra theme aren't taking different calls.
Fund managers admit it. "Contra funds are just another diversified scheme, with a value-buying edge," says Ventri Subramanian, head– equity at Religare Asset Management Company.
But selling these as 'different' schemes has not stopped. Many market experts were advising contra funds to (seasoned) investors just a few months earlier, as the markets were range-bound. Since no one, including technical analysts, were sure of the direction, contra was the way to go.
Contrarian bets means stocks/themes out-of-favour in the present market but expected to bounce back in the next two to three years. Bhupinder Sethi, head–equities at Tata Asset Management explains, "Contrarian stocks/themes are picked on the following two bases – It is a strong business economics in a bad news flow environment and low valuation."
So, in a market seeing a high inflation-high interest rate scenario, the risk-averse fund manager will run after fast moving consumer goods and pharma stocks for safety of returns. Instead, the contra manager will look at rate-sensitive ones such as banking and automobiles. And, even in those sectors, stocks available cheaply.
According to Gaurav Mehta, derivatives strategist at Ambit Capital, given the current market and economic conditions, cyclical sectors such as industrials, banking, construction, auto and infrastructure are contra bets.
Reason: industrial growth is expected to bottom out over the next five to six months. The type of recovery it sees will depend on policy actions. Importantly, no one has a timeline for government's policy announcements. Hence, over the next year, industrial and related stocks will be out-of-flavour. On the financial services front, many stocks' price movement is dependent on the Reserve Bank of India's decision on interest rates over the next six to eight months.
But things haven't been quite that simple for contra fund managers. They have had to follow the herd. Of the top 10 stocks invested in by SBI Magnum Contra Fund, four are in SBI's large-cap fund and one in its multi-cap fund. In the case of Tata Contra Fund, too, five of its top 10 stock holdings matches with the fund house's multi-cap fund (see table).
Some of these schemes also invest in Tata Motors' DVR (differential voting rights) or a Standard Chartered IDR (Indian depository receipts). Companies such as Reliance Industries, Cairn India, ICICI Bank, Bharti Airtel, GlaxoSmithKline, Tata Steel, Infosys, Wipro and Union Bank of India are among the top stocks in many of these schemes. The same stocks will also be found on any diversified fund's portfolio.
A senior manager from UTI Mutual Fund says there is lack of clarity on the contra theme, "Even fund managers are an impatient lot. There are frequent churns in these funds. Also, we are not clear on the definition of contra. Contra funds should, ideally, have stocks of out of favour sectors, say telecommunication. But contra funds are highly diversified to cap the downside, which is not the correct way. At the same time, returns sell products."
As far as returns go, SBI Magnum Contra has been the most successful contra fund, by returning 22 per cent since inception. Of course, it is the oldest one (13 years). In comparison, Kotak Contra has returned 11.73 per cent since it launched in July 2005, Religare Contra has given 9.5 per cent since March 2007 and Tata Contra has returned nine per cent since October 2005.
If retail investors want to create their own portfolio, it is a slightly tougher task. You need to be a risk taker and patient. Also, to have a long-term horizon of a minimum one year and a maximum of three to five years, as these scrips take time to turn around, warns Mehta.