The investment strategy deployed here needs to evolve more before we can draw confidence from it.
Several changes are afoot at Magnum Contra Fund. First, the fund has a new manager: R. Srinivasan took the helm in June 2011. Also, the manager has tweaked the investment approach. Despite what the name suggests, the fund isn’t a true-blue contra fund. Rather, the manager will adopt a flexible investment approach. To begin with, he will seek contrarian bets--in other words, stocks he believes to be intrinsically strong, but are out of favour due to reasons like perceived risk or negative sentiment. His recent investment in IT major Infosys bears out this aspect of the investment approach. In April 2012, when the stock price fell sharply following poor results, Srinivasan was quick to increase his investment, betting on the company’s robust fundamentals. The most recent portfolio disclosure shows the stock as the second-largest holding.
Conversely, when he is unable to uncover contrarian stocks that he likes, the manager will invest in growth stocks. For instance, presently his top holding is ICICI Bank, where he rapidly increased his investment to capitalise on its impressive run, in early 2012. Likewise, some of his investments in the auto and consumer staples sectors certainly belie any notions of a contrarian approach. In 2012 thus far, health-care stocks have been rather resilient in the face of volatile markets. As of April 2012, he was overweight (13%) the health-care sector versus the benchmark index BSE 100 (5%) and the category average (6%).
There are several positive signs, however. First, during the manager’s brief tenure, from June 2011 through April 2012, large caps have accounted for roughly 60% of the portfolio, with the balance (40%) invested in small/mid-cap fare. We have learnt from our interaction with the manager that going forward the portfolio’s market-cap makeup is likely to be similar. We take comfort from the presence of small/mid-caps in the portfolio, given that we believe Srinivasan has strength in evaluating such issues. Furthermore, he has shown flair in executing a growth strategy on a large-cap fund under his charge--Magnum Equity Fund. From May 2009 through April 2012, that fund has bested 78% of its category peers on the return front and 80% of the competition on the risk-adjusted return parameter.
That being said, the distinguishing factor for this fund will be the contrarian investments. It will be interesting to see how the manager plies that aspect of the strategy over the long haul. Another area to watch out for is the fluidity with which the manager merges his growth and contrarian bets. For now, we are inclined to believe that the strategy is still coming together and will evolve over a period of time. Until then, our confidence in the fund’s prospects will remain muted. Hence, we rate the fund Neutral.
