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SBI Contra Fund has been a shining star, consistently delivering remarkable returns in recent years. As of August 31, 2023, the fund boasted an impressive 3-year Compound Annual Growth Rate (CAGR) of 39%. Such remarkable returns have lured in investors. Its Assets Under Management (AUM) soared from approximately Rs. 1,300 crore in August 2020 to an astounding Rs. 14,607 crore by August 2023. This represents a staggering tenfold increase or a growth of 1,000%.
But why is it happening? Why are investors jumping onto this fund? And should you consider adding this to your portfolio if there is a fundamentally strong case for the fund?
These are some of the questions we’ll explore in today’s article.
We will delve into the fund’s historical performance and dissect the underlying factors that have propelled its success. By the end of this article, you should be well-equipped to determine whether SBI Contra Fund is the right addition to your portfolio.
So, let’s start by understanding what Contra funds are and their investment style
Contra funds take a contrarian view of a business or a stock. They invest in stocks other investors are not paying attention to or are likely to turn around. The main objective of such funds is to identify a turnaround story early on and buy stocks when they are available at low prices in relation to the potential returns they offer.
Let’s understand this with an example.
During Covid, hospitality stocks didn’t do well for obvious reasons. There were lockdowns, and people were not traveling. Contrarian investors would have looked at the valuations of such stocks and bought some that were available cheaply.
However, there is no objective definition of Contra stocks; therefore, it is subject to interpretation by the fund manager. Further, this investment style is very similar to Value investing. And to avoid confusion, SEBI guidelines state that a fund house can either offer a Contra Fund or a value fund to its investors. We can, therefore, safely assume that they are closely related.
So, in our analysis, we looked at both Value and Contra funds as a benchmark for the fund’s performance.
Now, let’s look at the fund’s performance.
The Turnaround in Fund’s Returns
If we look at the trailing returns of the fund, then the fund has outperformed its benchmark and peers in all time frames. However, if we look deeper, the outperformance is high in the short-term, but it’s not apparent in the 10-year time horizon.
So, it is possible that the fund has performed really well in the past few years, which is also pulling up its performance for a longer time horizon.
To see if that’s the case, we decided to look at the Fund’s rolling and periodic returns.
And what we found here tells a different story. The 3-year, 5-year, and even the 7-year rolling returns of the fund align with the category average, and the outperformance is not evident.
It points to the fact that the fund has done well only in the last few years.
Finally, when we looked at annual returns, it became clear that our initial hypothesis was true.
If you look at the chart below, then it shows that it was only from 2020 that the fund started to outperform its peers. Before that, it did not outperform its category average in any period.
From 2020 onwards, the scheme has performed exceptionally well and not only outperformed its peers but has done so by huge margins.
Calendar year return of sbi contra funds
This is a classic case of turnaround and also explains why investors have flocked to the fund.
But what are the reasons for this turnaround? Did something change at a fundamental level, or was it just because of the post-COVID-19 rally?
Let’s look at possible reasons for the scheme’s turnaround.
High Churn, High Mid and Small Cap Exposure, and Contra bets: Secret Sauce of The Fund
If we look back at the fund’s history, there was a change in fund managers of the scheme. Dinesh Balachandran was appointed as the new fund manager in May 2018 and has managed the fund since.
Now, when we look at the returns data, the period of outperformance coincides with this change. So, it is possible that the new fund manager’s investment style is making the fund deliver stellar returns. To find out if this is true, we decided to look at the portfolio in detail. And some numbers did stand out.
High Turnover Ratio
Firstly, there is a significant change in the fund’s turnover ratio. Since the new fund manager took over, this ratio has increased multifold. It went from being 44 in 2018 to 124 in 2019, and as of August 2023, it is at 230.
Further, if you compare its turnover ratio to all the funds in the category, it has the highest turnover ratio.
The high turnover ratio signifies that the fund manager is not following the buy-and-hold strategy and churning the portfolio quite frequently.
Now, this could be a potential factor contributing to improved returns by the fund. However, there is no back-tested study that shows a high turnover ratio can give high returns over an extended period of time.
Next, what stood out for us was the allocation towards Large, Mid, and Small-cap stocks.
High Exposure to Mid Cap Stocks
The scheme under the old fund manager had the largest allocation to Large-cap stocks. However, under the new fund manager, the allocation to large-cap stocks has decreased while allocation to mid-cap stocks has increased.
Market Cap allocation of SBI Contra Funds
Further, if we compare the scheme’s mid and small-cap exposure with its peers, then the fund ranks 5th in the category in terms of exposure to mid and small-cap stocks.
