Mutual fund schemes that take contrarian calls and buy into under-performing or undervalued stocks did better than others in India when stock markets worldwide roiled under a financial turmoil triggered by housing loan defaults in the US.
Loosely termed, contra funds, a majority of them which had been out of favour for a long time, have outperformed the Sensex during the stock market meltdown and, in the process, sharply moved up the ranks among mutual fund schemes.
All but one of the seven contra funds that have been in the market for more than a year have significantly improved their returns over the past six months.
While none of them are in the top quartile based on their 1-year performance, three of the seven funds have entered the top quartile on the basis of the performance over the past six months. The only laggard has been SBI Mutual Fund’s Magnum Contra Fund.
The Sensex fell 11.5 per cent over the past six months, since November 16. Four contra funds have outperformed the Sensex in this period. JM Contra Fund, having a six months performance track record, has fallen by only 5.2 per cent. Tata Contra, UTI Contra and ING Contra have fallen by 8.1 per cent, 10.8 per cent and 10.9 per cent, respectively.
These funds have also moved up through the performance ranks. JM Contra Fund ranks 5th on its six month performance, Tata Contra which is ranked 65 over its one year performance has moved up to 15th position over its six month performance.
It takes one to two years for the contra strategy to show on returns, said Tridib Pathak, chief investment officer, Lotus India AMC. “We invest in companies which fulfil three criteria — fundamental strength, underperformance and change in the business environment.”
Since he contra funds are on a lookout for the undervalued stocks the downside is limited. “The downside is protected as you are not buying momentum stocks and so when the market corrects, most contra funds that follow the discipline, outperform the market,” said Paras Adenwala, chief investment officer, ING Investment Management.
Also in the current market situation when most of the stocks have corrected from their highs in December, the companies available for investment in the contra domain have increased.
“The universe of stocks in the contra domain has increased and I have more choices now. There are also lot of good companies that have come in this vicinity,” Pathak said.