Markets are wont to behave in a volatile manner leaving the retail investor clueless about the right stocks that can weather the market swings and ultimately earn handsome returns. One way of making most of this volatility is by investing in stocks that are temporarily out of favor or are beaten down due to some reasons specific to the stock, but are fundamentally strong and capable of outperforming the benchmark index in the long run.

Contra Funds are mutual funds where the fund manager invests in stocks where he sees value that can be unlocked in the long run and are therefore candidates for a long term bet. The reason for these stocks being out of favor is either some news inherent to the stock or a negative trend applicable to all the stocks in that particular sector.

SBI`s Magnum Contra Fund, belonging to the Magnum sector funds umbrella, is one such fund that has fairly stuck to its investment objective and succeeded in giving good returns to the investors. The main objective of the fund is to provide the investors maximum growth opportunity through equity investments in stocks of growth-oriented sectors.

Launched in July 1999, the SBI Contra Fund is an open ended diversified equity scheme that can invest in large, mid and small cap stocks and has two options of growth and dividend for investors to choose according to their needs. The advantage of being a contra fund is that the fund manager may use his own discretion in selecting stocks under this category and the stocks that he feels are undervalued.

The fund boasts of assets under management (AUM) of Rs 1,448 crores making it the largest contra fund available in the market. Performance wise it has registered returns of 5.31% over a 6 months period and 15.77% over a year as compared to the category medians of 4.07% and 7.87% respectively. When looked at from a longer term horizon the fund has outperformed most of the funds in the equity diversified category with returns of 55.93% over a 3 year period and 51.85% over a 5 year period as compared to the benchmark (BSE 100 index) returns of 27.83% and 29.31%. When compared with other peer funds having the same investment objective, the fund has left behind every other fund in its category by miles.

Fund Manager Sanjay Sinha says “Whenever there is a significant variance between the inherent value of a stock as per our expectation and what the price reflects in terms of the market expectations of that stock there is a space which presents contrarian investment opportunities.” The portfolio does not have any bias towards market cap and has a mix of large and mid caps with the large caps currently having a higher proportion. The portfolio price earnings (P/E) ratio is fairly high at about 24 compared to peer group of diversified funds while the index of volatility, beta, at about 0.91 is on par with similar funds.

When asked by myiris.com to spell out investment style Sinha goes on to add, “We want the strategy of the fund to be relevant in all market cycles. Today we are in a phase where growth is the predominant style. Who knows, few years down the line value investing will be back in vogue and would like the strategy of Magnum Contra fund to be relevant then.”

The portfolio is fairly diversified now with about 50 stocks in the portfolio as compared to 36 stocks a year back. The top 3 sectors contribute to 30% of the total portfolio while the top 10 stocks comprise of 37% of the portfolio. Industrial Manufacturing, Energy and Automobiles are the top 3 sectors the fund has invested in while Praj Industries, Reliance Industries, Hindustan Zinc, M & M, and Jaiprakash Associates form the top five stocks that the fund has bet upon. The fund has stuck to its investment theme of being a long term fund with most of the stocks remaining the same throughout the last one year without any bias towards a sector as has been the policy of most of SBI`s mutual fund schemes. Sinha has attributed fresh fund inflows the 11% cash that the fund manager is sitting upon, which is relatively higher than its average in the last few months. One feature of the fund is the fund manager’s faithfulness to the investments, restricting portfolio churn to a minimum.

All said, does it stand the test of being a truly contra fund and dedicated to the investment objective of the fund? On investigating further into the holdings of the fund we find that the fund has a fair number of stocks which have not done too well in the recent past. There is about 7.25% exposure to pharma stocks like Cipla, Ranbaxy, Lupin and Biocon in its portfolio which have been under performers on the index for quite sum time now. It also has PSU banking stocks like Punjab National Bank, Oriental Bank of Commerce and Union Bank.

Reviewing the fund over the past one month, the fund has added the newly listed Power Finance Corporation (PFC) into its portfolio. On the other hand it has exited from realty stocks Sobha Developers, Parsvanath Developers and cement major ACC. It has gradually decreased its exposure to the construction sector from about 11% a few months back to 7% in last month. The IT stocks do not find much favor with the fund manager forming less than a one per cent of the total.

Overall, it is worth taking a look at this fund since contra investing works best during corrections, a phase that we may see now for the stock market.