SBI Contra Fund: Witnessing Turnaround Growth

Contra Funds aim to invest in such sectors and stocks that are temporarily out of favour and available at a significant discount to their fair valuation but have the potential to grow significantly. They offer a better margin of safety which gives them the potential to generate decent returns over the long run.

SBI Contra Fund is the oldest scheme in the Contra Fund category that has shown a turnaround performance in the last couple of years to figure among the top performers in the category.

Past performance is not an indicator of future returns
Data as on May 24, 2022
(Source: ACE MF)

SBI Contra Fund has shown turnaround performance in the last couple of years which has helped it to generate a significant lead over the benchmark and peers. In the last 1-year and 2-year period, SBI Contra Fund has generated a remarkable lead of around 10-20 percentage points over the benchmark S&P BSE 500 - TRI and also outpaced its peers. The recent superior performance has improved its long-term track record as well. Over the longer period of 5-year and 7-year, SBI Contra Fund has now managed to record a significant lead over the benchmark, whereas its performance was nearly in line with the category average.

SBI Contra Fund has also shown improvement in terms of risk-adjusted returns. The fund's volatility, as denoted by the standard deviation, is higher than the benchmark and its peers. However, the Sharpe ratio of the fund is currently the highest in the category and way ahead of the benchmark, thus compensating investors for the level of risk taken.

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Investment strategy of SBI Contra Fund

Categorised as Contra Fund, SBI Contra Fund has the mandate to invest a minimum of 65% of its assets in equity and equity-related instruments by following a contrarian investment strategy. The balance can be invested in foreign securities, debt and money market instruments, Rights, Derivatives, units of REITs & InvITs, etc. SBI Contra Fund focuses on companies and sectors that are currently out of favour but have the potential to bounce back and grow in the long run. It looks for temporarily neglected stocks which have strong intrinsic value and fundamental attributes. SBI Contra Fund also focuses on under-owned sectors that are out of favour but have high potential to show a turnaround.

SBI Contra Fund aims to timely identify attractive opportunities across market caps and sectors, to benefit from the turnaround potential of the beaten-down or temporarily neglected stocks and out of favour sectors. It usually holds substantial exposure across the market cap spectrum, viz., large-cap, mid-cap, and small-cap stocks. SBI Contra Fund follows a combination of the 'top-down' and 'bottom-up' approach to pick stocks within the contrarian investment theme.

SBI Contra Fund usually holds around 55-65 stocks spread across market caps. As of April 30, 2022, the fund held 66 stocks in its portfolio, along with a few overseas stocks. The fund has restricted the maximum allocation in each stock to under 5%. The top 10 stocks account for 25.2% of its assets consisting of large-cap and mid-cap stocks such as Tube Investments of India, GAIL (India), ICICI Bank, HCL Technologies, and Bandhan Bank among others. SBI Contra Fund usually records a higher turnover of around 130-160%.

SBI Contra Fund also holds exposure of up to 5% in overseas equities. Cognizant Technology Solutions Corporation and Netflix Inc. are the overseas equities that currently form part of the fund's portfolio.

In the last one year, SBI Contra Fund has made the most of the rally in the broader market and has benefited from its holdings in Neogen Chemicals, The Indian Hotels Company, Bank of Baroda, Ingersoll-Rand (India), Chennai Petroleum Corporation, ICICI Bank, Carborandum Universal, among others.

SBI Contra Fund's portfolio is not too concentrated towards any particular set of sectors and is currently diversified across 25 sectors. It has the highest sector exposure in Banks with an allocation of 12.8%, followed by Engineering, Power, Construction, Infotech, and Consumer Durables. Auto, Consumption, Petroleum, Cement, Oil & Gas, and Pharma are among the other prominent sectors in the fund's portfolio.

Suitability

SBI Contra Fund has showcased extraordinary performance in the last couple of years, wherein it outpaced the benchmark and its Contra Fund peers by a wide margin. While the volatility registered by the fund is on the higher side, it has managed to outperform in terms of risk-adjusted returns. The broad-based market rally witnessed after the March 2020 crash has helped the fund achieve this feat.

SBI Contra Fund avoids taking concentrated bets on any particular stock or sector. It usually maintains a diversified portfolio of stocks spread across market caps and sectors to benefit from the various opportunities present in the market. The current fund manager has done well to turn around the fortune of the fund in the last couple of years.

SBI Contra Fund is suitable for investors seeking an aggressively managed Contra Fund with a multi-cap strategy with an investment horizon of at least 5-7 years.

Warm Regards,
Divya Grover
Research Analyst

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Note: This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

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