SBI Contra Fund has emerged as one of the top-performing funds in recent years, drawing substantial attention from investors. As of August 31, 2023, the fund showcased an impressive three-year Compound Annual Growth Rate (CAGR) of 39%. This strong performance has led to rapid growth in its Assets Under Management (AUM), skyrocketing from approximately Rs. 1,300 crore in August 2020 to Rs. 14,607 crore by August 2023—a tenfold increase in just three years.

But what’s driving this impressive growth? What makes SBI Contra Fund stand out, and should you consider adding it to your portfolio? This article explores the factors that have fueled the fund’s recent success, providing the insights you need to make an informed investment decision.

What Are Contra Funds?

Contra funds follow a contrarian approach, investing in undervalued stocks that other investors may overlook. The goal is to identify potential turnaround stories early on and buy stocks when they are available at lower valuations with high return potential.

Example: During the COVID-19 pandemic, hospitality stocks faced significant declines due to lockdowns and reduced travel. Contrarian investors saw these stocks as undervalued and potentially profitable in the long run, making them prime candidates for investment.

SEBI regulations classify contra funds as similar to value funds, with fund houses permitted to offer either a contra or value fund. For our analysis, we’ve looked at SBI Contra Fund’s performance against both value and contra fund benchmarks.

Performance Analysis

Trailing Returns and Recent Outperformance

Over the short term, SBI Contra Fund has consistently outperformed its benchmark and category peers. However, on a 10-year horizon, the outperformance is less pronounced, indicating that much of the fund’s recent success has come within the last few years. To verify this trend, we analyzed the fund’s rolling and periodic returns and found a pattern: the fund’s recent performance has lifted its longer-term track record, pointing to a distinct turnaround since 2020.

Note: The fund's short-term returns, particularly the 3-year returns, are significantly higher than the long-term 10-year performance, suggesting a strong recent upswing.

A Look at Rolling Returns

When reviewing rolling returns, the fund’s performance aligns with the category average over 3, 5, and 7-year periods, supporting the idea that its outperformance is relatively recent. This insight helps potential investors understand that the fund has primarily excelled during the post-2020 market environment.

What Sparked the Fund’s Turnaround?

A key catalyst for SBI Contra Fund’s resurgence was the appointment of a new fund manager, Dinesh Balachandran, in May 2018. Under his leadership, the fund’s strategy shifted, resulting in significant changes in portfolio turnover and stock allocation.

High Turnover Ratio

Since Balachandran took over, the fund’s turnover ratio has increased significantly, climbing from 44% in 2018 to 230% in 2023. This high turnover indicates a more dynamic approach, with the fund manager frequently adjusting holdings rather than following a buy-and-hold strategy. Though a high turnover ratio doesn’t guarantee higher returns, it has likely contributed to the fund’s recent performance.

Increased Mid and Small-Cap Exposure

Balachandran’s management also brought a shift from large-cap to mid-cap stocks, increasing the fund’s exposure to higher-growth opportunities. Mid and small-cap stocks tend to outperform large-cap stocks over the long term, and SBI Contra Fund’s high allocation to these stocks has been another driver of its recent success. Among its category, the fund ranks high in mid and small-cap exposure, offering investors a well-balanced growth potential.

Strong Performance by Top Holdings

The fund’s top holdings include robust companies with strong fundamentals and recovery potential. Here’s a snapshot of the one-year returns of some of its top holdings:

Many of these stocks have provided exceptional returns, contributing to the fund’s performance. Additionally, several of these holdings are less common in flexi-cap schemes, confirming the fund’s contrarian approach.

Downside Risk Protection: A Key Benefit of the Contra Style

Interestingly, despite a high turnover ratio and significant mid and small-cap exposure, SBI Contra Fund has managed to limit downside risk. During six quarters when the NIFTY 50 generated negative returns, the fund outperformed in five of these periods, suggesting that its contrarian strategy also offers some protection in volatile markets.

This downside protection stems from the higher margin of safety inherent in contra investing, making it an attractive option for investors seeking both high returns and some resilience during downturns.

Risks of Contra Funds

Contra funds come with unique challenges. The contrarian strategy relies on identifying trends before the broader market does, which is challenging and can lead to extended periods of underperformance if stocks remain out of favor for a long time.

Conclusion: Should You Consider SBI Contra Fund?

SBI Contra Fund offers a high-risk, high-reward opportunity for investors with a long-term outlook. Its contrarian strategy, backed by a dynamic turnover and significant mid-cap exposure, has delivered exceptional returns over recent years. Additionally, the fund’s downside protection capabilities add an element of security for investors.

While it’s important to consider the risks, SBI Contra Fund could be a valuable addition to portfolios seeking unconventional growth opportunities. For those who understand and accept the risks associated with a contrarian strategy, the fund provides a promising path to long-term wealth creation.