Contra funds doing contrary act

Contra funds by mutual fund houses are finding energy, capital goods and financial services sectors as their favourites.

But there is one problem. Since these sectors are performers in the market (some of them are the best-performing sectors), these funds definition will not qualify as contra.

A contrarian style of investing seeks to invest in high-quality companies that are out of favour and possess potential hidden value to be unlocked.

The style involves not just focusing on neglected stocks with strong asset values or undiscovered concept stocks with strong wealth creating opportunities, but also picking high potential, under-owned sectors.

Going by the portfolio of some of these funds, it is quite evident that they function like a normal diversified equity fund without a contrarian approach.

While it totally depends on the contra fund manager as to which sectors and stocks he finds value and are under-owned, concentrating the portfolio on energy and capital goods stocks is doubtable.

A contra fund's investment philosophy is to avoid excesses in the market and using such opportunities to take contrarian positions.

While the BSE Capital Goods Index returned over 60 per cent last year, IT was the worst performer. However, contra funds are yet to set their eyes on the sector.

DBS Chola's contra fund has a weightage of 20.8 per cent for the energy sector followed by technology and metals. Similarly, financial services companies have been the largest concentration in Kotak's contra fund portfolio with about 18.13 per cent followed by energy with 11.80 per cent.

UTI's contra fund is overweight on energy sector with a 20.43 per cent weightage attached to it.

Moreover, stocks represented by these sectors are mostly blue-chip, large-cap scrips. Some of the common stocks, which figure in their portfolio are Reliance Industries, ONGC, Reliance Energy, RNRL, ICICI Bank, Tata Motors and Reliance Communications, among others.

"For a contra fund, one has to look for a long-term perspective. These funds tend to perform better in bearish phases, but markets last year were overall bullish. Moreover, these stocks have been picked at a time when they had a lot of positive upside in the near term and fitted to the contra style of investment," said a fund manager, who did not wish to be named.

It is worthless to call such funds as contra because the basic principle of contrarian investing, that is going against the herd mentality, is quashed by this kind of investment approach.

According to analysts, some stocks in the energy and capital goods sectors are still quoting at a premium relative to their sectoral PEs (price-to-earnings multiple).

"Most of the contra funds in the industry on Monday are struggling and are at the bottom of the performance table. Though managing a contra fund is challenging at times, all these funds have been functioning like general equity funds except Magnum Contra, which is hardly a contra fund," says Dhirendra Kumar, CEO, Value Researchonline.

Almost all contra funds in the industry lag behind their benchmarks.