Contra Mutual Funds in India

by Manshu on April 19, 2012

in Investments

Contra is short for contrarian and the idea behind contra mutual funds is to invest in shares of companies that aren’t popular and have lost favor with investors.

There are several contra funds in India, and I think it is fair to say that they have not really invested in a contrarian manner. If you look at their top holdings, you will find big names that everyone is aware of and are commonly owned by a lot of other mutual funds as well.

Here is a list of all contra funds that currently exist in India along with their top 5 holdings.

1. Kotak Contra Fund: Here are its top 5 holdings as on February 29, 2012 (the latest data that I could find.

HDFC Bank 6.24%
Infosys 6.03%
ITC Ltd. 5.76%
HDFC Ltd. 4.38%
Power Grid Corporation Limited 4.31%

2. L&T Contra Fund: Here is the top 5 holding data as on March 31 2012.

Reliance Industries 6.15%
ICICI Bank 5.50%
GSK 4.75%
Federal Bank 4.03%
ITC 4.01%

3. Religare Contra Fund: Top 5 holdings of Religare as on February 29th 2012.

Infosys Ltd 6.04%
Reliance Industries 5.39%
ITC Limited 5.03%
ICICI Bank Limited 4.92%
NTPC Ltd. 4.40%

4. SBI Magnum Sector Umbrella Fund – Contra: Here are the top 5 holding of this fund as on February 29, 2012.

ICICI Bank 7.45%
Dr. Reddy’s Labs 4.10%
SBI 4.09%
Bajaj Holdings 4.03%
Exide 3.39%

5. UTI Contra Fund: Here are the top 5 holdings of the UTI Contra fund as on February 29, 2012.

Infosys 7.29%
ICICI Bank 5.73%
ITC 5.58%
Reliance 5.19%
Tata Motors 4.84%

6. Tata Contra Fund: Here are the top 5 holdings of the Tata Contra Fund as on March 30, 2012.

HDFC Bank 6.77%
Infosys 5.44%
Sadbhav Eng 5.37%
CRISIL 5.22%
GSFC 4.68%

If you look at the shares that these contra mutual funds own, nothing remarkable jumps out at you and these are the same names you would expect to find in any other mutual fund that invests in equity in a diversified manner.

I haven’t included the expenses or returns of these funds, but having researched this data – I can see that they aren’t particularly impressive either.

I don’t really think of any of these funds as contra funds, and if I bought them ever I would think that I have bought a diversified mutual fund which has the word “contra” in its name and nothing more.

In fact I’m not quite sure whether you should buy something just because it is contrarian and how sound that philosophy really is. You should buy a share because you see value in it not because no one else owns it or you may just find that there was a good reason why no one else owned it!

{ 24 comments… read them below or add one }

Srikanth April 19, 2012 at 8:29 am

Manshu,

I considered this some time ago too, but I was not sure if looking at a portfolio snapshot is a right way to come to this conclusion (about their investing style). The timing of the buys should be also taken into consideration. For example, what if the banking stocks were bought during early 2009? That would have been a contrarian move. Without knowing the fund management and trading details, I am not sure such a conclusion is valid.

Regards,

Srikanth
FundsIndia.com

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Manshu April 19, 2012 at 6:23 pm

I appreciate that view point and if the timing was in a manner where they picked up the stocks when they were down, some of that should have translated in returns which I don’t see.

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bemoneyaware April 19, 2012 at 9:43 am

The Oxford English Dictionary defines contrarian as: A person who opposes or rejects popular opinion, especially in stock exchange dealing. In terms of mutual funds, Under contra investing, the fund manager focuses on investing against the prevailing market trend in assets that are performing poorly, and selling them when they perform well. The approach hubs on identifying neglected stocks that are undervalued today (trading at lower P/E multiple or P/BV), but have a potential of growing in the long-term. Hence broadly if we observe, contra investing is a subset of value investing.

The Indian mutual witnessed the launch of its first contra funds way back in the year 1999, with the launch of SBI Magnum Contra Fund – Dividend Option (in July 1999), and thereafter we have witnessed several contra funds.

As you pointed out most contra funds’ portfolios resemble those of equity diversified funds.They hold the same stocks which are held by the majority of equity funds. For instance, blue-chips such as HDFC Bank, Infosys ,ICICI Bank and RIL. Few things that I would like to highlight:

1. A similar portfolio does not necessarily mean that the fund is not taking contra calls. It all depends on the time of the call, price, valuation and capturing the industry’s business momentum.
2. Despite a portfolio strategy that’s similar to that employed by equity mutual funds, almost all contra funds have failed to outperform the average return from diversified equity funds
3. In India, most contra funds were launched over 2005-2007, when the stockmarket was on an upswing. In the last five years, AUMs of contra funds have come down drastically JM Contra Fund (launched with fanfare) is now merged.
I totally agree with your conclusion
There is ample evidence that contra funds have not stayed true to their objective, deviating from their investment mandate. In spite of this deviation, they haven’t helped the investor create wealth. Why should an investor choose a contra fund over a diversified equity fund, especially when it trails the latter in terms of returns and follows almost the same investment principle?

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Manshu April 19, 2012 at 6:22 pm

Surprised to see that Oxford includes stock market when talking about contrarian. Interesting – thanks for sharing. I feel that as long as there is a bull market everyone and their grandmother is a contrarian investor but as soon as stocks start to fall, people run for cover and forget all about contrarianizing.

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harinee April 19, 2012 at 9:55 am

L&T used to be Cholamandalam and was bought up by L&T.Returns were hopeless even in a performing market and I finally sold out at a loss.

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Manshu April 19, 2012 at 6:23 pm

Which fund did you own at the time?

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harinee April 19, 2012 at 9:56 pm

Cholamandalam was what when I bought .When I sold it was L&T contra(as L&T bought Cholamandalam)

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Manshu April 22, 2012 at 9:13 pm

Got it, thanks.

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Govindaswamy J April 19, 2012 at 11:57 am

When a contra fund operates only in shares, its portfolio would, over a period of time, resemble that of a diversified fund, especially in markets which suffer from lack of depth.
Contra funds could definitely perform better if it operates across various asset classes like shares, index funds, precious metals, debt markets, other commodities etc.
Contra investing operates on the principle that markets go thru’ cycles. It naturally follows that such investors should not be investing contrarily in the early stages of a cyclic change.
Though the above looks similar to trying to ‘time’ the market, it is different in the sense that a trained professional would be able to judge trends with a reasonable degree of accuracy.

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Manshu April 19, 2012 at 6:20 pm

Do you know of a fund that fits the criteria that you describe above? Preferably in India. Thanks.

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Govindaswamy J April 19, 2012 at 10:17 pm

Unfortunately, no. My comment was on the principles of contra investing. Coming to the last sentence in my comment, the sad part is that we do not have real “professionals” in any section of the financial world, ranging from investment managers, AMCs, analysts & business journalists. This world seems to jettison professionalism & prefers to depend on ‘contacts’, ‘inside information’, ‘networking’ etc. Success is measured by money made (by hook or crook, don’t matter) and not on rational benchmarks.

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Manshu April 22, 2012 at 9:09 pm

okay thanks, just wanted to know if there is something like that that I’m not aware of.

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Chandrashekar April 19, 2012 at 5:11 pm

Manshu,

Contrarian does not mean investing in unknown or lesser known companies. It may also happen that these contra-funds invest in regular companies when they are out of favor for specific reasons. Satyam stock after the scandal was beaten-down significantly. If a contra-fund manager feels that the company is fundamentally good and the industry offers scope for growth, it may decide to invest in Satyam. Other examples can be SKS Micro-finance or maybe Kingfisher currently ( if the fund manager feels it will bounce back eventually 🙂 )

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Manshu April 19, 2012 at 6:19 pm

If they had anything other than these blue chips I’d be more receptive to that opinion, and I doubt very much that these were bought when they went out of favor since the returns don’t show anything like that.

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Chandrashekar April 19, 2012 at 5:18 pm

Forgot to add, even Infosys got battered after the recent earnings and fell by more than 13% on a single day. As a contra-fund manager, if I feel that Infy definitely is worth more in the future than its value today, I am technically taking a ” contrarian” call and hence this qualifies as a
“Contrarian Investing” as per the fund mandate.

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Paresh April 20, 2012 at 9:19 am

As far I can understand contra action means as quoted by Warren Buffet:”Buy when everyone is selling and sell when everyone is buying”.Of course,success highly depends on identification and selection of that particular asset.
Few days back I remember one comment on this blog about Zinc where he state that since last few years Zinc prices are in the range of 85-120…But when prices are at 85,overall trend is so weak that very few dares to take contrarian buy action and same thing thing happens when prices are at 120…at this point,there are such flow of positive news that very few can dare to take contra short selling view.

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Paresh April 20, 2012 at 10:05 am

As far as contra mutual funds are concerned I think its difficult to manage these types of funds.First of all one can’t sit on the cash waiting for the good contra opportunity as regulations can’t allow it.Each fund carries hundreds of the stocks and selection of such number of stocks based on contrarian objective is truely difficult task.
So I think investor should learn to take own contra call in equity diversified funds or about particular sector,,rather choosing the contra funds.

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Manshu April 22, 2012 at 8:40 pm

Yeah I think if you want to contrarianize, then do so one your own, investing in a mutual fund is as mainstream as it gets and being a contrarian should not be the end goal itself anyway.

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Manshu April 22, 2012 at 8:42 pm

Funny that I can’t remember this comment about Zinc. But yeah I agree to the general point you are making.

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Chandru April 21, 2012 at 10:33 pm

Hi Manshu,
A few months back there was an intverview in Mutual Funds Insight by one of the Contra Fund managers. He reiterated the point which has been mentioned earlier in the thread – the timing of taking a position more than the choice of securities. But isn’t that the strategy followed by most mutual funds – to buy when it is low and it is low when it is out of favour?
Two other points:
1.Magnum contra seems to have the highest 10 year return compared to peers that have survived for similar period. Whether it is the investment philosophy, efficiency of the fund manager then or the size and rate of growth of fund I don’t know.
2.I wonder what is the main difference between value investing and contrarian investing.
Interested in knowing views.

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Manshu April 22, 2012 at 8:17 pm

Hi Chandru – If someone came in today and said I bought Puts on Apple then that I’m sure is contrarian investing, and if someone were buying Apple at $5 and their portfolio shows a healthy amount of Apple stock today then that’s contrarian investing and you own a blue chip even while you invested in a contrarian manner. I can understand and totally appreciate the view point on timing. But if you see a bunch of blue chips in someone’s portfolio and they say that we bought these during dips, well, then that’s not so different from a retail investor who had a SIP going and bought during the dips as well, right? That’s not all that contrarian.

To the question of contrarian and value investing – the one difference I would say is that while a value investor won’t choose a cash flow negative floundering business whereas a contrarian may seeing how it may turn around. Good idea for perhaps a next post on this.

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Chandran April 25, 2012 at 3:17 am

Hi Manshu,
That makes sense about contrarian and value investing.
Of late I have been thinking of a concept of “Contrarian Mutual Fund Investing”. It goes like this: One popular advice is to “Diversify” in mutual funds – to choose three to five mutual funds with different investment philosophies from different AMCs. I was wondering if the returns will be better if one decides on a single fund at any one point in time based on Index PE. When the Index PE is in the highest range (Say 22 plus) to invest in Gold/Debt funds;20-22 Low beta Blue chip funds like ICICI FB, FT Blue chip; 18-20 High Beta Blue Chip like DSPBR Top 100; 15-18 Multipcap fund like HDFC equity or Quantum Long Term equity and less than 15 Small Cap or sectoral funds with high beta including DSPBR microcap, Reliance Banking or Reliance Infrastructure. The logic is if the Index PE drops, hopping into the funds with higher beta at that time will be more beneficial than to invest in a blue chip fund on Dec 20 last year or DSPBR microcap when the index is at its peak; also since multicap funds like HDFC equity metamorphose based on the scenario, the input of the MF manager will be most useful in these funds in this market range – what is your opinion on this?

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Sridhar April 23, 2012 at 12:21 pm

Hi All,
Thanks for sharing your interesting views and comments. I can see that many people have different views and opinions on contra investing.
In my opinion no formula or philosophy or method can be so perfectly applied to get consistent returns in all market conditions. The contra style can work good at times, and can fail at times.
Recently Infosys results were bad and the stock was beaten down. In this backdrop lot of contra funds would have picked the stock. But such opportunities are very less.
Also defining ‘contra’ is quite subjective. Just because a stock is beaten down doesnt mean it can be a good contra bet.
Theory says that if you buy using contrarian style you can expect above-market returns. But there are also risks or issues with such bets. In practice you can even lose money or see paltry returns. For normal investors it may not make sense to wait for the so called ‘contra’ or value opportunity to invest. Rather you should have a systematic plan to invest regularly in reputed, large companies that you believe will do well for atleast a decade. Some of the boring strategies actually work better and produce consistent results/returns than the interesting strategies (like value, contra, growth, etc). In fact the boring strategies have a mix and match of various styles that gurus recommend.

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White April 25, 2012 at 3:52 pm

Very good post.Really thank you! Cool.

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