Q: Let’s start with what contra funds really mean and do these contra funds add anything to an investor’s portfolio, Tarun?
A: Value investing looks at more fundamental factors whereas contra looks at underperforming stocks and sectors available at a cheaper valuation; so from a standpoint, contra funds are defined as against the wind kind of investing style. The manager of a contra fund always looks at prevailing market trends by buying assets that are either underperforming or depressed at that point in time. So if you look at least year, one-one and a half year we have seen many sectors like telecom sectors, pharmaceutical sectors – they are going through rough times and we have US FDA issues going on in the pharmaceutical sector, telecom, we had seen a lot of issues happening, due to that these sectors were depressed in terms of their valuation. Most of these contra fund managers try to take a bet in two sectors like this, so from that point of view both value and contra will add some element premise, but value is more from a fundamental matrix point of view like a price to earning price to book value matrix they always look at but contra will be more depressed sectors more qualitative factors they look into. Just to give you a quick background, in India normally 50,000 crores of assets are available in this value as well as contra category and the average market cap based on my observation is mostly into mid and small-cap stocks. The average market cap of these stocks is between 20000 crores to 1,00,000 crore, which is way lower than 3 to 3,50,000 crores which are available in the nifty stocks, so from that point of view, most of the value investment is into mid and small-cap funds. If I go towards the experience in terms of performance in the last three to five years these funds have not been able to outperform NIFTY also because of the mid and small-cap after 2018 SEBI re-categorization we have seen a lot of mid and small caps underperforming. So, we have seen this category also has been affected because of that, and most of the value and contra funds have underperformed, the basic nifty index underperformed from there but from a 5 to 10-year point of view or 7-year point of view if you look at it they have performed well.
Q: But Tarun you know even that very good performance is absolutely in line with what our diversified Multi cap fund has given right so does an investor really need to add a value fund or a contra fund to their portfolio, and you know we were speaking with DSP’s Aparna Karnikar and she said that a value fund would be recommended for a more conservative investor because of you know the concept of margin of safety which they used to invest, would you agree with that, do you agree with that, do you think people need to add this to their portfolio?
A: So exactly, based on the data that we have I don’t see a very serious case for having this as a part of a portfolio because India as a market has been a growth market, so most of the fund managers have the option to buy value stocks also in their diversified portfolio.
So, from that point of view, if you look at it a diversified portfolio is doing more justice giving much more ability, flexibility to the fund manager to move in and move out. But, yes, there is a strong case of value investing also in a market like a COVID scenario where we are in right now, there are a lot of sectors which are currently going through depression and in that phase value investors may find a lot of hidden gems at that point of time, from that point of view may be between 5 to 10% of your portfolio could be looked at into something like this category, but I would not recommend a high proportion that is there in this strategy.
Q: Okay so Tarun, 5 to 10% but is it for every kind of investor. I mean is it really for a conservative kind of investor-a value fund or a contra fund?
A: So as mentioned by me before the average cap of value or contra funds has been mostly into mid and small-cap stocks. This category any which way requires a minimum of 5 to 7 years horizon. Anybody looking at a 5 to 7-year horizon is basically meant for a high-risk investor, so ideally it is for a high-risk investor and not a low-risk investor.
Contra funds are a very new category with merely 3 funds to track. Value funds on the other hand are an older category with over a decade of returns to track there. So that’s a value fund and contra fund. There is an element of risk, it’s not entirely safe, you may want to be more scheme-specific, go into the merits of each scheme and the investments that have been made in full requirements, and would require just a little more hard work. Tarun Birani does not recommend actively looking at value funds as an investment unless an investor is willing to stick to an upper limit of 10% and that too in a satellite portfolio.