At Personalfn, our view on new fund offers (NFOs) is well-documented. We have always maintained that investors should invest in NFOs only if they offer an investment proposition that is distinct from the one offered by existing funds. Given that NFOs are untested entities, investing in funds with proven track records is advisable, if the investment propositions in both cases are comparable. Having evaluated several NFOs launched in recent times, it was apparent that most were refurbished versions of existing funds; to further worsen matters, they were capable of adding little or no value to investors portfolios.
Continuing with our series of articles on NFO reviews, we now put Tata Contra Fund (TCF) under the scanner and evaluate its performance.
TCF's investment proposition
Launched in November 2005, TCF is a diversified equity fund from Tata Mutual Fund. As the name suggests, the fund pursues the contrarian style of investing. Simply put, a contra fund operates on the premise that equity markets keep throwing up investment opportunities for the discerning investor from time to time, by way of temporary/short-term occurrences. The latter result in fundamentally strong stocks becoming attractive buys. When markets turnaround, these stocks tend to get valued in line with their fundamentals and the investor clocks a return based on the uptick.
Contra investing draws from value investing and is often regarded as a subset of the latter. In the context of domestic mutual funds, the contra funds segment is a rather niche one.
TCF is mandated to invest 70%-100% of its assets in equities and equity-related instruments and the balance (upto 30%) in debt and money market instruments. It can invest in stocks from across market segments in an unrestricted manner.
How Tata Contra Fund fares vis-à-vis peers
| |
NAV
(Rs) |
6-Mth
(%) |
1-Yr
(%) |
Since
Incep.
(%) |
Std.
Dev.
(%) |
Sharpe
Ratio
(%) |
| DSP ML Equity (D) |
46.62 |
-13.8 |
23.7 |
28.4 |
8.68 |
0.23 |
| Magnum Contra (D) |
31.87 |
-13.7 |
22.3 |
32.9 |
8.23 |
0.20 |
| Templeton India Growth (D) |
51.47 |
-13.5 |
21.1 |
21.5 |
8.01 |
0.20 |
| Tata Contra (G) |
14.38 |
-8.6 |
19.9 |
15.5 |
8.76 |
0.11 |
| UTI Master Value (G) |
35.87 |
-16.5 |
17.4 |
25.2 |
8.99 |
0.09 |
| S&P CNX 500 |
|
-5.3 |
19.7 |
|
|
|
(Source: Credence Analytics. NAV data as on May 16, 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)
For the purpose of peer comparison, we have considered value and contra funds that have been in existence for atleast a 3-Yr period.
TCF pitches in an average performance on the net asset value appreciation front vis-à-vis peers. Over the 1-Yr time frame, the fund has posted a growth of 19.9%. DSP ML Equity (23.7%) tops the rankings, while UTI Master Value (17.4%) languishes on the lowest rung in the peer group.
TCF has outperformed (albeit marginally) its benchmark index i.e. S&P CNX 500 over the 1-Yr time frame. Since inception in November 2005, TCF has clocked a growth of 15.5% CAGR.
Volatility
Standard Deviation is a measure of the risk that a fund has exposed investors to. With a Standard Deviation of 8.76%, TCF fails to distinguish itself vis-à-vis peers. Templeton India Growth (8.01%) delivers the best performance, while UTI Master Value (8.99%) fares the worst.
Risk-adjusted return
Sharpe Ratio is a measure of returns delivered by a fund per unit of risk borne. With a Sharpe Ratio of (0.11%), TCF's performance is nothing to write home about. Simply put, as compared to its peers, the fund has failed to adequately compensate investors for the risk that they have been exposed to. DSP ML Equity (0.23%) occupies the top slot on this parameter.
The above graph clearly indicates the modest performance pitched in by TCF as compared to its benchmark index i.e. S&P CNX 500. Rs 100 invested in KCF at inception (November 2005) would have grown to approximately Rs 142 at present. But, if the same amount was invested in the benchmark index, it would have appreciated to around Rs 186.
In a nutshell¦
It must be mentioned that these are early days for the fund. Ideally equity-oriented funds should be evaluated over a longer time frame (at least 3-5 Yrs); TCF has been in existence for a little less than 3 years. Hence, the possibility of TCF delivering an impressive showing over the long-term cannot be ruled out. Having said that, it can be safely stated that the fund has delivered a rather lackluster performance across both the risk and return parameters so far.
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 TCF in their portfolios.
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