Retail investors who are looking to soup up their portfolios with contra calls may find it difficult to do so as even seasoned fund managers are in a fix. Why? The recent rally has ensured that there isn’t a single stock in the BSE-30 whose returns are in the negative in the past year. In the NSE-50, there is only one stock – IDFC which is down 6 per cent. Even in BSE-100, only two stocks — IDFC and Nestle — are in the red.
Clearly, taking a contra call has become a tough job. No wonder, contra funds — ones which are supposed to take contrarian calls —are being merged. Last year, Tata Contra Fund was merged with Tata Equity Opportunities Fund. And Kotak Contra Fund was renamed Kotak Classic Equity. UTI Asset Management Company (AMC) also plans to merge its Contra Fund with its Multicap Fund, say officials with the fund house. “It’s not just absence of opportunities, but also pressure to cap the downside in market conditions that are conducive,” says a fund manager with UTI AMC.
No wonder, K Ramanathan, executive director & chief investment officer at ING Investment Manager feels that individual investors should stick to large-cap or diversified funds and the contra bets that fund managers of these funds take.
Investors are to be blamed as well. They want themes like contra and even index funds, but expect them to outperform in short times. “Sometimes it may happen that a theme or sector is expected to play out in two years but due to market conditions it takes longer. This makes investors jittery,” says UTI’s fund manager.
A look at the top holdings of some of the contra funds tells the story. The top holdings of SBI Contra Fund include ICICI Bank, HDFC Bank, State Bank of India (SBI), HDFC, and four defensives Infosys, Tata Consultancy Services, ITC and Merck. Similarly, UTI Contra’s top holdings are ICICI Bank, Reliance Industries, ITC, SBI, Axis Bank, ITC, Punjab National Bank, Infosys, Wipro and Maruti.
It’s not that these schemes have done badly. Religare Invesco Contra has given 50.50 per cent in the last one year, UTI Contra has given 37.50 per cent and SBI Contra has given 25.50 per cent. In comparison Sensex gave 31.50 per cent in the same period. In the last three months Sensex returned 16.50 per cent, Religare Invesco 29.50 per cent, UTI Contra gave 27 per cent and SBI Contra gave 21 per cent each.
Contrarian bets are those where out-of-favour companies are invested in. For instance, a strengthening rupee might make information technology (IT) companies unattractive because their margins are hit. While this is popular wisdom, a contra fund manager would pick up IT stocks and wait for the rupee to weaken. Typically, contra funds have the potential to give good returns in a consolidating market.
But Vetri Subramaniam, chief investment officer of Religare Invesco Mutual Fund says that there could be some room still there for contra fund managers and investors: “Contra funds are diversified funds with a value-oriented strategy as opposed to the growth-oriented strategy (of diversified funds). Even though the valuations have moved up many notches there is a strong case for investment in this theme,” he says. You can take up to 10 per cent exposure in contra funds.
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