The recent downturn in equity markets has provided investors the opportunity to evaluate their mutual fund investments in a new light. While riding rising markets by taking on higher risk is the easy route to deliver an impressive showing, the fund's showing during a prolonged bear phase is often the true test of its character.

The contra funds segment is a rather niche one in the domestic mutual funds segment. Contra investing draws from value investing and is regarded as a subset of the latter. It entails investing in fundamentally strong companies that are presently out of favour. In other words, the fund manager takes a bet that is contrary to the popular trend in the markets.

A contra fund operates on the premise that equity markets keep throwing up investment opportunities for the discerning investor from time to time. This comes by way of temporary/short-term occurrences which make fundamentally strong stocks attractive investment propositions for the investor. When markets turnaround, these stocks tend to get valued in line with their fundamentals and investors clock a return based on the uptick.

In this article we discuss the investment proposition offered by Kotak Contra Fund (KCF) and find out how it fared vis-à-vis other professed value and contra funds.

KCF's investment proposition
Launched in July 2005, KCF is a diversified equity fund from Kotak Mutual Fund. As the name suggests, the fund pursues the contrarian style of investing. It is mandated to invest 65%-100% of its assets in equities and equity-related instruments and the balance (0%-35%) in debt and money market instruments. Finally, the fund can invest in stocks from across the investment universe in an unrestricted manner.

How KCF fares vis-à-vis its peers

	NAV (Rs)	6-Mth (%)	1-Yr (%)	Since Incep. (%)	Std. Dev. (%)	Sharpe Ratio (%)
DSP ML Equity (D)	42.42	-8.9	34.3	27.6	9.76	0.13
Magnum Contra (D)	29.68	-9.9	33.1	32.4	9.25	0.12
Templeton India Growth (D)	45.56	-13.7	28.4	20.5	9.48	0.09
UTI Master Value (G)	33.41	-7.0	26.3	24.7	10.85	0.06
Kotak Contra (G)	15.68	-11.7	16.4	16.8	8.81	0.02
S&P CNX 500		-29.0	27.2

(Source: Credence Analytics. NAV data as on March 31, 2008.)
(Standard Deviation highlights the element of risk associated with the fund. Sharpe Ratio is a measure of the returns offered by the fund vis-à-vis those offered by a risk-free instrument)

KCF's performance on the net asset value (NAV) appreciation front vis-à-vis peers leaves a lot to be desired. Over the 1-Yr time frame, KCF (16.4%) languishes on the lowest rung in the peer group. DSP ML Equity (34.3%) tops the rankings, followed by Magnum Contra (33.1%). Also, KCF has failed to match its benchmark index (S&P CNX 500) over the 1-Yr time frame. Since inception in July 2005, KCF has clocked a growth of 16.8% CAGR.

Volatility
Standard Deviation is a measure of the volatility that a fund has exposed investors to. With a Standard Deviation of 8.81%, KCF delivers the best performance in the peer group. Conversely, UTI Master Value (10.85%) fares the worst.

Risk-adjusted return
Sharpe Ratio is a measure of risk-adjusted returns delivered by a fund. With a Sharpe Ratio of (0.02%), the fund pitches in a mediocre showing and trails the entire peer group. Simply put, the fund has failed to adequately compensate investors for the risk that they have been exposed to. DSP ML Equity (0.13%) and Magnum Contra (0.12%) occupy the top two slots on this parameter.

The graph underscores the poor performance pitched in by KCF as compared to its benchmark index i.e. S&P CNX 500. Rs 100 invested in KCF at inception (July 2005) would have grown to Rs 155 at present. But, if the same amount had been invested in the benchmark, it would have appreciated to Rs 196

In a nutshell¦
Notwithstanding the fact, that the fund house has stated that a 1-3 Yr period is the ideal investment horizon, we believe these are early days for the fund. It has been in existence for a little less than 3 years, which should be the minimum time frame for evaluating an equity fund's performance. Having said that, the fund's performance on the NAV appreciation and risk-adjusted return fronts leave a lot to be desired. However, KCF's showing on the volatility control front is noteworthy.

What should investors do?
Now the question is, should investors consider investing in the fund? That would ideally depend on their risk appetite, investment objective and existing portfolio, among a host of other factors. At Personalfn, we have always maintained that a one size fits all approach doesn't work while investing. An investment avenue that is apt for one investor could be grossly unsuitable for another. Therefore, investors would do well to consult their investment advisors/financial planners to determine the suitability of KCF in their portfolios.

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