The frontline equity indices have been making new highs in recent times. Valuations have moved to uncomfortably high levels in several segments. Some pockets, though few, have been languishing for the past few years. In euphoric markets, the ability to consider out-of-favour sectors for potential opportunities is what much of contra investing is all about.
Given the elevated market levels and overvalued segments, it may well be a good time to consider contra investing as a means to portfolio diversification and risk reduction.
SBI Contra is a solid fund following this style of investing. The fund was launched in 1999 and recently celebrated its silver jubilee. Over the past 25 years, the fund (regular plan) has delivered a healthy compounded annual return of 20.1 per cent.
The fund’s performance has especially been on the upswing over the past 5-6 years, and has been among the best across equity categories, despite its contra style investing mandate.
SBI Contra can be considered by investors for the core part of their portfolio, and take exposure via SIPs for a period of at least 7-10 years to reach long-term goals.
Steady above-average performance
The fund has delivered 3-9 percentage points more than its benchmark – BSE 500 TRI – over one, three, five and 10-year timeframes on a point-to-point basis. The scheme’s five-year CAGR of 30.9 per cent is among the best, even when considering broader diversified equity fund categories.
On a rolling three-year basis over July 2018 to July 2024, SBI Contra has delivered an average return of 30.9 per cent annually, compared to 20 per cent for the BSE 500 TRI over the same period.
Again, one three-year rolling returns over the same timeframe, the fund has beaten the benchmark all the time (100 per cent).
If SIP returns (XIRR) are considered over the past 10 years, the fund has given a robust return of almost 23 per cent in this timeframe. An SIP in the BSE 500 TRI would have managed 18.1 per cent over the same period.
SBI Contra has thus been a fairly consistent and above-average performer over the medium to long term.
The fund has an upside capture ratio of 110.4 – based on data over the past three years (2021-2024) – indicating that its NAV rises much more than the benchmark BSE 500 TRI during rallies. But more importantly, its downside capture ratio is only 56.8, suggesting that the fund’s NAV falls a lot less than the benchmark during corrections. A score of 100 indicates that a fund performs in line with its benchmark.
Smart portfolio moves
SBI Contra shuffles its top sector holdings mostly in line with its mandate of not sticking excessively to current market favourites. For example, in 2021, when manufacturing, oil & gas, consumer goods and automobile had not yet become preferred sectors, the fund took significant exposure to these segments and greatly benefitted from the subsequent rally. Over the last year or so, the fund has upped stakes in the pharma and information technology sectors, which have largely been ignored by the markets in recent years. The financial services segment has been the top holding across timeframes.
The fund has thus managed to hold a mix of ignored segments and some market favourites.
SBI Contra takes a multi-cap approach to stock selection across market cycles. While large-cap stocks are the preferred bets, the fund had taken heavy bets on small cap stocks, which paid off handsomely and propelled returns.
From heaving large-cap and small-cap heavy portfolios in the past few years, the fund has now increased exposure to mid-caps and reduced small cap stakes.
In the recent June portfolio, the fund has a 43.3 per cent exposure to large-caps, 26.4 per cent to mid-caps and 13.8 per cent to small-caps. The fund also takes exposure to derivatives. Usually, derivative exposures are to the most liquid indices – Nifty or Bank Nifty. Cash and equivalents, and treasury bills can total up to around 8-9 per cent of the portfolio at times.
Despite following a multi-cap style, SBI Contra manages a diffused stock portfolio. Together with hedging via derivatives and cash positions, the fund keeps risk at reasonably moderate levels.
SBI Contra is suitable for any investor with an above-average risk appetite, who can digest occasional bouts of short-term underperformance in lieu of robust long-term returns.
Taking the SIP route for 7-10 years is ideal for directing the instalments towards financial goals.