Contra investing draws from value investing and is regarded as a subset of the latter. It entails investing in fundamentally strong companies/sectors/themes 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 and hence the name contrarian investing.

A contra fund operates on the premise that investment opportunities fall in two categories a) those that are identified by most investors and therefore already form part of their portfolios and b) those that are ignored or not yet identified. Since investment opportunities under Category A are identified by most they are overbought and are therefore trading at higher valuations.

The investment opportunities in Category B are what really interest the contrarian investor. These opportunities come by way of temporary/short-term occurrences which make fundamentally strong stocks/sectors attractive investment propositions for the investor. When markets turn around, these investment opportunities tend to get valued in line with their fundamentals and investors clock a return based on the uptick.

Continuing with our series on mutual fund reviews, we profile the most popular contra fund in the industry - Magnum Contra Fund (MCF).

MCF's investment proposition

Launched in July 1999, MCF is a diversified equity fund from SBI [Get Quote] Mutual Fund. The fund is among the earliest practitioners of contra investing. It is a part of the 'Magnum Sector Funds Umbrella' series and pursues the contrarian style of investing. It is mandated to invest between 90%-100% of assets in equities and upto 10% in money market instruments. It can invest in stocks from across market segments in an unrestricted manner.

One distinct feature that sets the fund apart from other contra/value funds is its investment strategy of blending contra investing with an aggressive growth approach. This involves aggressive churning to align consistently with the investment objective.

How Magnum Contra Fund fares vis-�-vis peers

	NAV (Rs)	1-Yr (%)	3-Yr (%)	5-Yr (%)	Std. Dev. (%)	Sharpe Ratio (%)
DSP ML Equity (D)	38.00	-5.6	30.6	41.8	8.54	0.17
Magnum Contra (D)	21.91	-10.2	28.7	49.6	8.66	0.11
Templeton India Growth (D)	41.40	-6.7	21.9	33.5	8.07	0.13
ICICI [Get Quote] Pru. Discovery (G)	23.42	-18.9	15.3	-	9.20	0.01
UTI Master Value (G)	28.45	-10.4	12.1	24.1	9.15	0.06
BSE 100		-9.4	22.1	30.4

(Source: Credence Analytics. NAV data as on July 4, 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-�-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 a minimum 3-Yr period.

Over the 3-Yr time frame, MCF's NAV has posted 28.7% CAGR (compounded annual growth rate) and ranks second in its peers group. DSP ML Equity (30.6% CAGR) tops the rankings, while UTI Master Value (12.1% CAGR) languishes on the lowest rung.

Over the 5-Yr time frame, MCF (49.6% CAGR) fares the best among peers, followed by DSP ML Equity (41.8% CAGR) and Templeton India Growth (33.5% CAGR). Since inception in July 1999, MCF has clocked a growth of 28.8% CAGR.

MCF has outperformed its benchmark index i.e. BSE 100 over the 3-Yr and 5-Yr time frames.

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Volatility

Standard Deviation is a measure of the risk that a fund has exposed investors to. With a Standard Deviation of 8.66%, MCF pitches in an average performance on the volatility front vis-�-vis peers. Templeton India Growth (8.07%) delivers the best performance, while ICICI Pru. Discovery (9.20%) 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%), MCF's performance can best be described as mediocre. DSP ML Equity (0.17%) occupies the top slot on this parameter, while ICICI Pru. Discovery (0.01%) once again languishes at the bottom.

The above graph clearly underlines the superior performance pitched in by MCF as compared to its benchmark index i.e. BSE 100. Rs 100 invested in MCF at inception (July 1999) would have grown to approximately Rs 985 at present. The same amount invested in the benchmark index would have appreciated to Rs 346.

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 MCF in their portfolios