The Hindu Business Line : `Good time for a contrarian strategy'<br>Mr Sashi Krishnan, CEO, Chola Contra Fund

In a momentum-driven market, the time is ripe for contrarian investing, says Mr Sashi Krishnan, CEO of Chola Mutual Fund, who was in Chennai recently for the launch of Chola Contra Fund. In a chat with Business Line, Mr Krishnan explained how the new fund will put a contrarian strategy into practice and where it hopes to find investing opportunities.

Excerpts from the interview:

What investment strategy do you have in mind for this fund?

This fund will look for extremes in the market. We are clearly in a momentum market. Empirical studies show that you can get significantly higher risk-adjusted returns from a contrarian portfolio than from a momentum portfolio.

For instance, in a study of the US market from 1926 to 1982, researchers constructed a portfolio of losers and one of winners, and compared their 36-month returns for the entire period. On the average, the loser portfolio gave an annual return of 19 per cent, but the winner portfolio gave a relative return of minus 5 per cent, compared to the market. We ran a similar check on Indian stocks between 2000 and 2005 and found that a portfolio of losers in the BSE-200 fared extremely well over the following years.

It may be easy to find neglected stocks in a bear market. But after the breathtaking rally of the past couple years, is there any stock idea that hasn't yet been unearthed?

It is a myth that you can find contra investing opportunities only in a bear market. You can find them in a bull market as well. You can find contra opportunities in the broad market, within sectors and within segments.

In the broad market, for instance, mid-cap stocks sharply outperformed large-caps between April 2003 and October 2004. That was a contrarian opportunity to invest in large-caps. With large-caps running ahead of mid-caps in the recent past, there could soon be a contrarian opportunity to invest in mid-caps.

Among sectors, auto and capital goods stocks severely underperformed IT and pharma stocks from 1999 to 2001, but the position has sharply reversed since. There could also be contrarian picks within sectors. Nicholas Piramal trailed far behind Dr Reddy's in the 2001-2004 period, because people believed contract manufacture was a low-end activity. But the stock has outperformed the pharma pack over the past year.

We also feel that a Contra Fund is relevant at this stage of the market, because valuations have more or less caught up earnings and the easier part of the rally is over. Investing from now on, will call for some careful stock selection. Downside risk will also be lower if we focus on fundamentally sound companies trading at a discount to their intrinsic value.

How do you plan to identify contrarian stocks?

We feel that a qualitative approach doesn't work in contrarian investing, so we will be going mainly by quantitative parameters. We will first shortlist stocks that have underperformed the market. We will be using numbers to drill down the list- stocks that have fallen 50 per cent from their peak, those at a valuation discount to their sector or those trading at a discount to their book value. We will then put them through filters for business model, management quality and so on, before selecting stocks for the fund's portfolio.

Isn't it true that a contrarian strategy can backfire at times? Funds that took contrarian exposures to oil/gas or PSU bank stocks over the past two years have severely underperformed their peers...

It is also important in a contrarian strategy to time your investment right. Along with identifying an underperformer stock, you also have to find triggers through which the underperformance is likely to be corrected. Those who took exposures to oil/gas stocks last year probably expected price increases on petroleum products to come through much earlier than they have.

Right now, I believe oil marketing companies such as HPCL, BPCL may offer a investing opportunity. Though there is a perception that the profit margins of these companies are under pressure, there have been gradual price hikes on petroleum products over the past few months. In 7-8 months time, even with the current product prices, these companies will be making money.

More Stories on : Interview | Mutual Funds

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page