Amit Ganatra is the fund manager of Invesco India Contra Fund, one of Invesco’s highly successful funds. The fund has delivered a return of 16.3% over the past year even as other multi-cap funds have struggled. The fund has a five-year CAGR of 23.75% and a 10-year CAGR of 17.35%. RupeeIQ spoke to Ganatra to know more about what contra investing is and what today’s contra sectors are.
- Invesco India Contra Fund has delivered a 19% return (as of 18th June 2018) in a year in which most other mutual funds have struggled. What has caused the fund to deliver such a wide outperformance?
A. Invesco India Contra Fund’s performance is largely attributed to its stock selection, which is consistent with its investment strategy i.e. to invest in stocks of
(a) Companies that are in a turnaround phase (b) Companies trading below their intrinsic values
(c) Growth companies trading at de-rated valuations.
Historically, the fund has benefitted from the turnaround in the performances of its key investee companies and has also had a meaningful alpha generation from valuation opportunities in select companies. This strategy has helped the long-term investors of the Contra Fund to gain from both the Earnings Growth as well as Price to Earning (P/E) re-rating.
- The fund is mandated to follow a contrarian investment strategy. Can you elaborate on exactly what this means?
A. Contrarian investment strategy largely implies identifying stocks that are presently out of favour for varied reasons that could be influenced by factors internal to the company, e.g. turnaround phase, interim bottlenecks etc., or factors external to the company, such as slowdown in the industry, and the impact of macro-parameters on the industry at a given point in time.
- Several of the fund’s top holdings are similar to those of other multi-cap funds. Has the fund’s contrarian focus been diluted over time?
A. When investing in any new company, Contra Fund’s preference is for companies in a turnaround phase and those trading below intrinsic value. Over a period, many of these companies graduate from value phase to growth phase of their lifecycle. So, at any given point in time, Contra fund will have companies that are no longer contra as they have moved into the growth phase of their lifecycle. The objective of the fund is to benefit from this phase as well. We measure our value bias based on aggregate exposure to contra ideas. As on date, 68% of the Contra’s portfolio is in the preferred category of turnaround companies, de-rated companies and those trading below intrinsic value. In fact, at any given point in time, the aggregate exposure in value categories will not fall below 60%.
- Large caps account for almost 65% of the fund’s portfolio. Do you feel that they present a better case at current valuations than small and mid-caps?
A. Invesco India Contra Fund has a value-based investment strategy, irrespective of the market capitalization. In retrospect, in the year 2013, when midcaps were cheaper than large caps, Contra Fund’s portfolio was more inclined towards midcaps. Over the past few years, however, valuations in the midcap segment have become expensive, making a case for Contra fund to shift allocation in favour of large caps. This allocation is very much aligned with the fund’s investment strategy.
- The fund’s top holdings account for quite a significant portion of its portfolio. To what extent is portfolio concentration an integral part of the fund’s strategy?
A. Invesco India Contra Fund’s portfolio is reasonably well diversified across stocks and sectors. As at May 31, 2018, the fund had 40 stocks in its portfolio.
- Technology and Pharma are considered by many to be the most promising contrarian bets at present. Tech stocks have already seen a major rally and several funds are also bullish on Pharma. What is your take on these two sectors?
A. Contra Fund had built an overweight position in Technology sector last year alone as valuations had corrected to attractive levels. Now, within the Technology sector, companies have similar business models which are unlike the case of Pharma sector where there are different companies with different risks and rewards and hence our view on Pharma is more bottom up. We were underweight on Pharma until last year as valuations were still high. However, since the beginning of the current year, we have added few companies from the healthcare space due to attractive risk reward. The portfolio today is in fact overweight Pharma.