Kotak India EQ Contra Fund: Eliminating Emotional Bias

While investing, fund managers of contra funds have a strong conviction in the fundamentals of the sectors and stocks they pick for the portfolio and believe they could perform well in the long run. The assumption is that the stock or sector are resilient enough to bounce back to its fair value over time once the short-term issues become irrelevant and/or are completely eliminated.

During uncertain and volatile conditions such as the one we are witnessing now, the category may hold lower risk because the stocks are already out of favour and thus the margin of safety is high.

Kotak India EQ Contra Fund is one such contra style fund that has stood strong even during depressing market conditions.

Data as on April 13, 2021
(Source: ACE MF)

While KECF has managed to restrict losses in bear markets, it has not compromised much on returns during bull market rallies by picking the right stocks. KECF has delivered decent performance over the last couple of years that has helped improve its long term returns vis-a-vis the benchmark and category peers. Over the longer 5-year and 7-year period, KECF's performance has been far better than the benchmark, where it has managed to generate an alpha of about 2.5 percentage points. Even in the last 1-year the fund managed to outpace the benchmark by close to 7 percentage points CAGR.

This outperformance has come at a reasonable risk. The fund's Standard Deviation (22.24%, annualised) is nearly in line with its benchmark (21.85, annualised) though slightly lower than its category average. In terms of risk-adjusted returns denoted by the Sharpe Ratio, KECF has outperformed its benchmark by a significant margin and also stayed ahead of the category average.

Investment strategy of Kotak India EQ Contra Fund

Categorised under Contra style funds, KECF is mandated to follow a contrarian investment strategy and maintain a minimum 65% of its portfolio in equities. While constructing its portfolio, the fund follows a smart Quantamental approach on portfolio construction. KECF defines the Quantamental approach as a blend of IQ and EQ (a mix of quant and fundamental analysis).

It uses IQ to form a fundamental outlook on the stocks shortlisted from the investment universe through a mix of the top-down and bottom-up approach to stock picking. Within the fundamental outlook, the fund gives weightage to Business quality, Promoter, Sector, Moat, Competition and also looks at Growth at a Reasonable Price (GARP). It uses EQ for Quantitative analysis of stocks considering parameters like Earnings, ROE, Value, Quality, Risk, Liquidity, Cash, etc.

The fund holds high conviction overweight/underweight position on stocks and sectors that are in sync and the IQ is equal to EQ. For stocks and sectors that are not in sync or the IQ is not equal to EQ, it further dissects and analyses the stock for decision making.

Accordingly, KECF maintains a balance between IQ and EQ to take non-consensus and high conviction calls. KECF's portfolio is inclined more towards large-caps, which usually account for about 70% to 80% of its assets. It also holds significant exposure of 20-25% in mid-cap stocks.

KECF usually holds a well-diversified portfolio of about 50 to 60 stocks. As on March 31, 2021, the fund held 55 stocks in its portfolio that were reasonably diversified across sectors. The top 10 holdings accounted for about 47% of the portfolio. Index heavyweights like ICICI Bank, Infosys, HDFC Bank, and Reliance Industries, currently find place among top holdings in the portfolio. Ultratech Cement, SBI, Axis Bank, TCS, L&T, Supreme Industries, etc. currently figure among other prominent holdings with exposure in the range of 2% to 4% each. The fund usually follows buy-and-hold investment strategy to derive the full potential of stocks in its portfolio.

KECF's prominent bet on companies like Infosys, Reliance Industries, HDFC Bank, ICICI Bank, Ultratech Cement, etc. has turned out to be rewarding in the last one year. It has also benefited from its holding in L&T, Gujarat Gas, Supreme Industries, AU Small Finance Bank, Axis Bank, TCS, Jindal Steel & Power, among others.

Among sector holdings, KECF's current portfolio is majorly exposed to Banking and Finance having a combined allocation of about 32%, followed by Infotech (13.1%), Petroleum (7.8%), and Cement (7.1%). Engineering, Consumption, Auto, Pharma, and Oil & Gas are the other prominent sectors with an exposure of about 3% to 7% in each. Construction, Telecom, and Consumer Durables figure among the other core sectors in the fund's portfolio. The top 5 sectors in KECF's portfolio together account for around 60% of its assets.

Suitability

KECF is backed by well-defined investment systems and processes. It has the ability to timely pick neglected but fundamentally strong names typically in the large-cap segment. Though the fund resists from compromising on risk and does not aggressively chase returns, it carries the potential to generate market-beating returns in the long run. This can help investors benefit from decent risk-adjusted returns over longer time horizons.

The fund management typically invests in stocks with high intrinsic value and gives them adequate time to realize the growth potential of each investment in the long run. Moreover, the fund has been agile enough to take advantage of various investment opportunities present across stocks and sectors. KECF is suitable for long-term investors with preference for stability of large caps along with decent alpha (in terms of returns).

Warm Regards,
Divya Grover
Research Analyst

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Note: This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

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