Contra Funds — Steady returns

In the market carnage of 2008, most equity funds had a tough time containing declines. However, one category of equity funds — contra funds — fared very well on this count. Contra or contrarian funds seek to invest in fundamentally good stocks that are undervalued due to temporary market sentiment, in the hope that when the undervaluation is corrected, such stocks deliver superior returns. Most contra funds do not have a long track record. Only three of the eight contra funds have a three year track record.

Increasing cash positions, lowering mid-cap exposures and switching between momentum and defensive sectors may have helped the cause. A wide gulf between top and bottom rankers suggests the difference in one or more of the above-mentioned approaches.

Performance: Only some contra funds (that were in existence then) have given a above-benchmark performance in the bull market of 2007. Only Magnum Contra and Tata Contra, were the ones which delivered over 80 percent returns from trough of 2007 to peak in early 2008. The rest, while delivering steady returns in absolute terms failed to beat the CNX 500 or the BSE 500.

But in the bear market since that period, six out of the eight contra funds managed to contain losses better than the benchmark and other diversified funds.

Portfolio moves: Most of the portfolio moves of contra funds suggests that their strategy is not too different from normal flexi-cap diversified equity funds. Contra funds had invested 20-60 per cent of their portfolio in mid-cap stocks in late 2007 and early 2008. This has now been trimmed to 15-24 per cent in most of the cases.

. In terms of sectors invested in by these funds, most of them had moved to defensives — software, consumer non-durables and pharmaceuticals, in 2008.

But these funds’ January 2009 portfolio reveals that most of them have banks, petroleum and capital goods among their top sectors. With valuations at reasonably attractive levels in these hot theme sectors of 2007, perhaps funds see value in going back to them.

Most of these funds have over 15 per cent in cash or debt as against being nearly fully invested last year, which helped them ride out market volatility.

So should investors buy more contra funds? Magnum Contra and Kotak Contra may be fair options to consider.