Invesco India Contra Fund Review: Do Contra Funds Work?

Invesco India Contra Fund is a value-oriented contrarian fund launched in April 2007. In this post, we review its performance with its benchmark and category peers. With an AUM of 3000 plus crores, it has moved into the 7th (out of 17) position in the value-oriented funds category. Such funds can frustrate for investors during market uptrends, however some of them do well during downtrends or sideways markets. Invesco India Contra Fund fell only by -0.97% in the last year (fourth in the category). Let us first consider its investment strategy

Invesco India Contra Fund: Investment strategy

The scheme aims to find fundamentally sound stocks that are currently undervalued or out of favour but are expected (in the management’s opinion) to do well in the future. It aims to to follow a bottom-up approach to stock selection (i.e. focus on individual stocks and not industry) with a contrarian bias.

It defines contrarian bias as “companies trading below fundamental value; companies in turnaround phase and growth companies available at attractive valuations”. It has not market cap restrictions and can have higher or lowe exposure to particular sector when compared with the benchmark (BSE 500 TRI). It can invest in attractively priced growth stocks.

Invesco India Contra Fund Review: Do Contra Funds Work?

Background image courtesy: Invesco leaflet

Performance since inception

 

Invesco Contra Fund Performance Since Inception

This is a normalized plot of the fund with its benchmark. A contra fund will underperform during a bull run and perhaps even a bear run, but I expect it do well during a sideways market (2009-2013). Instead, the first real sign of outperformance since inception came after the end-2013 rally. This is where Value Discovery stands out. check out its review here: ICICI Prudential Value Discovery Fund Performance Review

ICICI Value Discovery performance since incpetion

Quantum Long Term Equity Value Fund has also performance well in the same period. Read its review here: I am worried about Quantum Long Term Equity Value Fund: Should I Exit?

Quantum Long Term Equity performance since inception

I think the real judgement time for Invesco Contra Fund is right now. So far (since Jan 2018, when the market momentum dropped) it has done well.

Rolling Return Performance Comparison with Benchmark (5 years)

Now we shall compare every possible 5 year returns from the fund with its benchmark (BSE 500 TRI) over 5 years and 10 years. As you can see below, it is fairly decent over 5 years but not spectacular. I have added Nifty Large Midcap 250 TRI for comparison. This is 50% of Nify 100 (large caps) and 50% of Nifty Midcap 150 TRI.

Invesco contra fund 5 year rolling returns vs benchmark

Rolling Return Performance Comparison with Benchmark (10 years)

Over ten years, there is not much history (only a two-year investment time frame – see horizontal axis), but the fund has done well.

Invesco contra fund 10 year rolling returns vs benchmark

Rolling Risk Performance Comparison with Benchmark (5 years)

Next we shall consider risk as measured by the standard deviation. This means that for each five year window, we consider monthly returns and find out how much each individual return deviates from the average. This is considered a measure of risk.

Invesco contra fund 5 year rolling standard deviation vs benchmark

Rolling Risk Performance Comparison with Benchmark (10 years)

Invesco contra fund 10 year rolling standard deviation vs benchmark

Although over ten years, this fund has been consistently less volatile (curve which is lower is less volatile), over 5 years, the consistency has been poor. In the last couple of years, the fund has been just as volatile as the benchmark This could be the reason the 5 year seems to have fallen sharply since early 2018 (see 5 year rolling returns chart).

Invesco India Contra Fund vs ICICI Value Discovery vs Quantum Long Term Equity

As an analyst, such a comparison is inevitable. For those who are considering an alternative to value discovery, this becomes important.

Rolling returns 5 years and 10 years

Invesco India Contra Fund vs ICICI Value Discovery vs Quantum Long Term Equity rolling returns over 5 and 10 years

Rolling risk 5 years and 10 years

Invesco India Contra Fund vs ICICI Value Discovery vs Quantum Long Term Equity rolling risk over 5 and 10 years

The only thing going for Invesco India Contra Fund is that over 5 year roling periods, it has recently outperformed Value Discovery.  Reutrn-wise there is not much difference between the Invesco and Quantum funds. However as QLTE is less volatile, it is better. IMO, ICICI Value DIscovery is the undisputed king of the value oriented or contra space. I still think it is despite the so-called slump in performance.

 

Comparison with other peers

We shall now include Birla Pure Value Fund and Tata Equity PE fund into the mix.

Rolling returns 5 years and 10 years

Invesco india contra fund return comparison with peers

Rolling risk 5 years and 10 years

Invesco india contra fund risk comparison with peers

There is not much to differentiate Invesco India Contra Fund and Tata Equity P/E Fund in terms of return, but the Invesco fund is a bit less volatile. Aditya Birla Pure Value Fund has seen an sudden increase in 5Y risk and drop in returns. It is also too young to take 10 year performance seriously. I would be wary of funds with such swings in risk and returns.

Do Contra Funds Work?

Contra funds choose out of favour value stocks and this has to be distinguished between a growth stock found at attractive prices because the whole market is down. Therefore contra funds will work only for those who understand the importance of a diversified portfolio and consider overall portfolio volatility and returns and not worry too much about individual funds. This means, that contra funds would only appeal to an insignificant few.

Many assume value investing in individual stocks and in a mutual fund are the same. They are not. When the average investor hardly exhibits patience, a value or contra it will force mutual fund manager to change strategy and chase growth stocks. Very few fund managers would have the conviction to stay the course. It is too early to tell if Invesco India Contra Fund is one such fund. As mentioned above, its testing time has only just begun and investor should not consider its performance post 2013 to choose this.

Summary

Invesco India Contra Fund has performed well post 2013 and has just about managed to beat its benchmark. A recent increase in volatility and drop in returns over fiver-year windows implies that investors need to give this fund more time to check how it performs in a turbulent market. If you are an existing investor, there is no need for concern, just keep an eye on performance. If your are a new investor considering this fund (assuming there is space for one in your portfolio), I think Quantum Long Term Equity or ICICI Value Discovery are better picks. They have worked when a contra fund is expected to work as shown above during a sideways market. In this regard, Invesco has a unfavaourable track record.

Do contra funds work? Yes, some of them do, but only for an informed investor.

 

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Updated: March 9, 2019 — 1:07 pm

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M. Pattabiraman

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  1. Can you also please give an analysis of HDFC Capital Builder Fund?

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