Unveiling the Key Factors Contributing to SBI Contra Fund's Superior Performance
In the dynamic world of investment funds, the SBI Contra Fund has stood out as a top performer, particularly since 2020. As of August 2023, the fund ranks 5th in its category for exposure to mid and small-cap stocks.
Key Factors Behind SBI Contra Fund's Success
The exceptional performance of the SBI Contra Fund can be attributed to several key factors. Firstly, its contrarian investment strategy allows it to focus on undervalued and out-of-favour stocks with significant recovery potential. This approach enables early investment in companies or sectors before they become market favourites, especially during volatile periods or market corrections.
Secondly, the fund maintains a well-diversified portfolio, which helps manage risk while capitalising on turnaround opportunities. Its strong historical track record suggests experienced fund management and disciplined selection of contrarian stocks.
Thirdly, the period since 2020 has seen significant market volatility, with disruptions and recoveries triggered by global and domestic economic factors. Such an environment is favourable for contra funds, as undervalued stocks often rebound sharply during economic recoveries. SBI Contra Fund likely benefited from these market corrections and subsequent rebounds.
Lastly, the success of the SBI Contra Fund requires skill in assessing market cycles and identifying under-researched stocks. The consistent long-term value orientation of the fund suggests prudent management, which has contributed to its outperformance.
Top Holdings and Returns
As of August 2023, the top 10 holdings of the SBI Contra Fund include Cognizant Technology Solutions Corporation, Oil & Natural Gas Corporation Ltd., GAIL (India) Ltd., Delhivery Ltd., Cipla Ltd., Coforge Ltd., Axis Bank Ltd., Reliance Industries Ltd., HDFC Bank Ltd., and ICICI Bank Ltd. Five of these holdings are less popular among flexi-cap funds, indicating a focus on less mainstream investments.
The fund's turnover ratio, which measures the frequency of buying and selling stocks within the portfolio, is at 230, the highest among all Value and Contra funds. This high turnover ratio could be a result of the fund's active management style and the new fund manager, Dinesh Balachandran, who took over in May 2018.
The top 10 holdings have generated good returns in the last year, with three generating close to 40% return. However, the 3-year, 5-year, and 7-year rolling returns of the fund align with the category average, and the outperformance is not evident in the long-term.
Downside Protection and Growth
The SBI Contra Fund's strategy offers investors good downside protection, with the fund falling less than NIFTY 50 in 5 out of 6 quarters when NIFTY 50 gave negative returns. This downside protection, combined with the fund's high returns, has contributed to its impressive growth. The fund's Assets Under Management (AUM) increased from approximately Rs. 1,300 crore in August 2020 to Rs. 14,607 crore by August 2023, representing a tenfold increase or a growth of 1,000%.
In summary, the combination of contrarian stock picking, disciplined diversification, skilled management, and favourable market conditions since 2020 are the primary drivers behind SBI Contra Fund's outstanding performance. The fund's focus on less popular stocks and its high turnover ratio set it apart in the investment landscape. However, it's important to note that while the fund has performed exceptionally well since 2020, the outperformance is high in the short-term and not apparent in the 10-year time horizon. As always, potential investors are advised to consider their individual risk tolerance and investment objectives before making any decisions.
Mutual funds like the SBI Contra Fund provide investors with opportunities to finance and invest in undervalued stocks that have the potential for significant recovery, as demonstrated by the fund's success since 2020. With a focus on contrarian investments, well-diversified portfolios, and experienced management, the SBI Contra Fund has been able to capitalize on market volatility and rebound during economic recoveries.
