In the first three-and-a-half weeks of trading in the new year, the Bombay Stock Exchange’s Sensitive Index, or the Sensex, has been range bound – a phase that many market experts would call a consolidation phase. And there are expectations that after the Union Budget, the market could enter a correction phase as well.
“Currently, the market is in the second leg, when the mid- and small-cap stocks give decent gains. Typically, the third leg of a market rally witnesses returns from contrarian calls,” said D Sundarajan, chief executive officer, Trendy Investments.
Contrarian funds are those where the fund managers bet on out-of-favour companies. 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.
“The more important factor, in case of contrarian bets, is the longer-term view that a fund manager has to take on a stock unlike equity-diversified schemes,” said a chief executive of an asset management company.
This category of funds has done reasonably well during the short term. While the Sensex has risen 4.58 per cent in the last one month, eight contra funds have returned in the range of 6.42-8.70 per cent.
Further, over a three-month period, the returns have been quite volatile, but higher than the benchmark index. While the Sensex has risen 0.92 per cent, these schemes have returned between 3.64 per cent and 11.13 per cent.
This is the reason why many experts feel that contra funds can give better returns in a consolidating as well as correcting market.
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However, those who have kept faith over a longer period would disagree. In the last one year, the Sensex has risen 87.43 per cent, whereas contra funds have returned around 85-119 per cent.
The similar or even better returns are because of the fact that fund managers are often forced to follow the bandwagon. “The problem with investors is that while they invest in a contra theme, they wish to get returns in all kinds of market. When the market is rising, they expect high returns. When it is falling, then they start viewing these schemes as contrarian and still expect good returns,” said a fund manager. Fund managers, therefore, are unable to take strong contra calls.
Investors are also unwilling to wait long enough for returns. An unfavourable stock or sector may take five-seven years to turn around and become a multi-bagger. The only contra fund that has been around for five years, Magnum Contra, has given annual returns of 33 per cent, almost 10 per cent more than the Sensex.
“It is not for those who are unwilling to wait for at least three-four years. One cannot expect to book profits in these funds in a few months,” said another fund manager who did not wish to be named as his fund house does not offer a contra scheme.
Sectors which make good contra bets are defensive sectors such as pharma and fast moving consumer goods. “That is mainly because these sectors are good picks and hedge against downside,” said Mukesh Dedhia, director, Ghalla Bhansali Stock Brokers.
At present, the telecom sector is out of favour because of 3G delays and falling average revenue per user. If a fund manager were to buy into this sector now, there could be great returns over the long term.
Financial planners said one should invest 10-15 per cent of the portfolio in such schemes. But match them to financial goals over the long term.
