Kotak goes the other way

Kotak Contra hopes to make money by betting against the majority.

There has been a spate of mutual fund launches across market capitalisation segments - large-caps, mid-caps and small-caps.

Funds have been launched to track various benchmark indices, bet it the Sensex, the CNX Midcap 200 and even the Nifty Junior Index. Amidst this 'follow the herd' trend comes a new fund - Kotak Mahindra Mutual Fund has launched a contrarian fund named Kotak Contra. 
 

Kotak MF's equity schemes Returns in per cent as on June 2, 2005
Scheme	3 months	1 year	2 years	3 years	5 years
Kotak 30	-2.41	42.73	61.26	43.55	15.59
Kotak Global India	1.33	53.12	-	-	-
Kotak Midcap Fund	7.66	-	-	-	-
Kotak Opportunities Fund	10.06	-	-	-	-
Source: www.mutualfundsindia.com

What exactly is contrarian investing? Well, it simply means that this scheme will resist the temptation to follow the general market trend and, instead, invest in a contrarian manner.

It proposes to follow a bottom-up approach to stock selection, identifying fundamentally strong companies which are temporarily unpopular due to short-term downturn in the sentiment.

The fund says that while the markets are driven by fundamentals in the long term, short-term stock prices are influenced by the market sentiment.

In the short term, the market sentiment may prevent the stock prices of companies from correctly reflecting their intrinsic worth because temporary business or management issues may be interpreted as fundamental negative changes.

Also fundamentally positive changes may not be recognised, but instead taken as temporary drivers.

However, the fund notes that over a longer period earnings drive stock prices and the market price of a company's stock tends to converge on its intrinsic value, reflecting its fundamental value. Thus the fund hopes to create returns for investors as the markets wake up to their true value.

Examples of where a contrarian investing approach worked are many. PSU stocks post the general election of 2004 are a case in point, as speculations that the Left parties might threaten the disinvestment process led to a crash in stock prices.

But the stocks bounced back after a lull. The impact on Tata Motors stock, following the perceived failure of 'Indica' is another example.

The premise is that, investors who pick strong stocks at the right times - when the market is generally ignoring them - can generate significant returns when the market begins to recognise their intrinsic worth. Contrarian investing also involves low monetary risk as investments will primarily be in undervalued stocks, at the lower end of valuations.

However, this approach is not without risks. A contrarian approach means taking high 'time risk', as it might take a longer time for markets to recognise under-valuation, and thus for stocks to generate returns.

SBI Mutual Fund's Magnum Sector Umbrella - Contra Fund is the only other dedicated contrarian fund in the Indian industry. If the performance of that fund can be taken as an indication, Kotak's Contra Fund should do well.

SBI MF's contra fund has given a return of nearly 94 per cent over the past year and 95 per cent for the two-year period. Even for the five-year period, the fund has held up well, giving 38.50 per cent returns.

But Kotak Mutual's other equity diversified funds have mostly been middle-of-the-road performers. The best performing Kotak-30 and Kotak Global have given returns of 42.73 per cent and 53.12 per cent respectively over the past one year.

Issue opens: June 2, 2005

Issue closes: July 1, 2005