Contrarian? Not so much

PERSONAL FINANCE

Returns, portfolio of contra funds very much similar to equity diversified funds

Contrarian funds, which take an opposite view of the market, have performed in line with equity diversified funds. Typically, such funds go against popular market sentiment and pick stocks that are undervalued or beaten down.

The corollary is that if there is a sharp fall in equity diversified funds, by say 40 per cent, contrarian funds should be able to contain their losses to 20 per cent or less, and vice versa. However, the performance of contrarian funds and equity diversified funds has not been very different.

In the bull phase from June 14, 2006 to January 8 this year, equity diversified funds provided average returns of 77.09 per cent and contra funds returned between 50 and 79 per cent.

The biggest player SBI Magnum Contra Fund, with assets of Rs 2,070 crore, even outperformed the category average of equity diversified funds with returns of 79.43 per cent.

In a bear phase, the similarities are even closer. From January 8, 2008 to July 16, 2008, the returns of equity diversified funds fell 42.45 per cent and contra funds declined between 39 and 41 per cent. Clearly, the performance does not reflect the contrarian nature.

Further, the portfolios of contra and equity diversified funds are also similar.

Among the top 20 stocks, 11 are common. The top stocks are Reliance Industries, ICICI Bank, Infosys Technologies and BHEL. As far as contrarian calls go, most contra funds are into oil marketing companies including HPCL, GAIL, IOC and ONGC, but in smaller quantities.

According to Anoop Bhaskar, chief investment officer (equities), UTI Mutual Fund, most fund managers have to deal with the pressure of delivering both in good and bad times.
 

Scheme Name	Bear Phase Jan 8-Jul 16, 2008	Bull Phase  Jun 14 '06-Jan 8 '08	Assets (Rs cr)
Magnum Contra	-40.96	79.43	2070.69
JM Contra *	-40.91	–	637.33
UTI Contra	-38.42	49.49	208.00
Tata Contra	-42.87	63.63	103.43
Kotak Contra	-42.27	70.46	82.27
Lotus India Contra**	-40.33	–	47.77
DBS Chola Contra	-48.74	54.48	14.65
ING Contra	-40.16	72.76	9.47
Diversified Equity Funds	-42.45	77.09	–
Assets as on 31st Jul 2008                                                                         * Launched in August 2007 ** Launched in March 2007                                                                            Source: Value Research

“Investors expect good returns in both rising and falling markets, which is unfair to the label of the fund,” said Bhaskar. This automatically leads to investment in popular stocks and contrarian calls.

Contra funds come next to index, large-cap and medium-and small-cap equity diversified funds, in terms of the risk ladder. But they can balance the equity portfolio as a good 5 per cent to 10 per cent of the portfolio can be invested in such funds.

Sajag Sanghvi, certified financial planner, said, “We advise contra funds for investors who have a 3 to 5-year time horizon.

“These funds need time as they pick stocks when the market sentiment is not too good. For investors with a shorter time horizon, an equity diversified fund is still the best choice.”