JM Financials have recently come out with a Contra fund named JM Contra fund. But what exactly are these contra funds and how do they work? Do they give a better investment option as compared to any other normal fund? Let’s discuss the answer to these questions in this article.
Contra stands for contrarian and is supposed to be the opposite of value investing.
The contrarian approach is said to involve a lot more complex stock picking and investment process. What contrarian fund management approach stresses is as follows:
Contrarian approach is more to do with identifying the neglected stocks, which may be undervalued today, but promise a high growth potential in the long run. These stocks are expected to be bought cheaper today, as they may be ‘neglected’ by the market in the short run resulting in low prices, but may turn out to be the winners in the long run. The fund manager and analysts of a contra fund claim that they can identify such stocks – which are available at dirt cheap prices today as they are neglected by the market in the short perspective. They claim that by identifying such stocks and investing in them today, they are able to capitalize upon the market valuation and benefit from the long term investment horizon when these stocks become valuable, as the market gradually identifies their potential.
These funds believe that the best time to build up a portfolio is when there is an unwarranted risk aversion in the market coupled with high pessimism, and they aim to exit from the market when markets or stocks are heated up. In essence, these funds take “opposing” or “contrarian” positions with respect to the market estimates and valuation and aim to benefit from them.
JM Fund also claims the same: “JM Contra Fund would follow this simple rule in making investments into specific sectors, stocks or segments. It will aim to have a first mover advantage by investing into 'out of favour' sectors/stocks.Thus increasing out performance prospects. It would incubate stocks for a while before they find favour with the rest of the market. It would also proactively identify new investment themes and build up strong positions before a majority of investors do. JM Contra Fund would endeavor to generate steady returns with low volatility”
They also give justification for coming up with timing of launch of the Contra fund now: “During the past one year we have seen markets being excessively volatile resulting in high risk aversion among investors. Sharp downsides seen in the market on the back of uncertainties in global events, economic growth, government policy etc. have resulted in extreme skepticism in the market. All such events are converging today, creating huge opportunity for generating future returns. Therefore the current environment is apt for contrarian investment.”
The above approach of contra fund investment is opposite to the normally followed approach in mutual fund – often termed as value investing. Value investing also involves doing research and coming up with stock recommendations, but it is usually done for stocks that are well established in the market (like so called blue-chip stocks) or the stocks that have started to prove their value by posting good results (like the mid-cap stocks).
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