Chiranjivi ChakrabortyEditor, The Economic TimesSynopsis
Good contrarian opportunities can come either from a top-down sectoral perspective or bottom-up company specific issue. Sometimes, an entire sector is written off by the market just as it is approaching the end of an earnings downgrade cycle. This then leads to good contrarian opportunities.
MUMBAI: Dinesh Balachandran, who manages SBI Mutual Fund’s Contra Fund, is a worried man. Balachandran says while the market is rightly betting on cyclical stocks, but buying those perennial “money- losing companies with no concrete plans” is nothing but blind speculation, the fund manager told ETMarkets.com in an interview, where he also speaks about why he became a contrarion investor, his idea of what makes a contrarion and sectors he is betting on.
Following are the edited excerpts:
Q. What does it take to be a contrarian investor in India? What is your process for identifying contrarian opportunities in the market?
India is a primarily growth-oriented market. Hence, to be an effective contrarian investor, not only is it important to distinguish between temporary growth issues and structural problems, the opportunity cost involved in holding on to an investment should also be a key consideration. Good contrarian opportunities can come either from a top-down sectoral perspective or bottom-up company specific issue. Sometimes, an entire sector is written off by the market just as it is approaching the end of an earnings downgrade cycle. This then leads to good contrarian opportunities. For example, the pharma sector in 2019, capital goods sector in 2020, and power space in 2021. Understanding the macro-environment and nature of cycles is very important in such cases. From a bottom-up perspective, good quality companies can sometimes go through a tough phase. The key here is to understand whether the problems are temporary in nature and also identify the catalysts that can get the company to get re-rated again.
Q. As a contrarian investor, do the current market conditions worry you?
Valuations of the broader markets have gotten re-rated significantly over the last 12 months. The extreme value opportunities seen last year are no longer available. However, if someone is willing to take a longer-term view, there are still good risk-reward opportunities available in the market. Last year, one just needed staying capacity to make money in the market. Going forward, the nature of economic revival will be key for investment returns.
Q. What are the red flags that the contrarian in you is seeing in the market internals or market structure currently?
The most worrisome aspect is the froth that can be seen in some of the lower quality stocks. Betting on cyclical revival is fine with me, but betting on perennial money-losing companies with no concrete plans for turnaround is more a sign of blind speculation.
Q. Going by your portfolio, financial services seem to be your biggest bet. What are you seeing in the sector that the market is missing, in your opinion?
We are actually underweight on the sector compared with the benchmark. However, we are very optimistic on the corporate NPA cycle turning around and have significant holdings in banks that have a corporate heavy portfolio. Meanwhile, we are not assanguineon the retail lending side and valuations of some of the retail focused financial institutions appear very expensive to us.
Q. I noticed that your portfolio is tilted on the cyclical side. Why do you see that as a contrarian bet when most investors have been switching towards a cyclical theme over the past nine months?
Getting out early can be one of the biggest mistakes in contrarian investing. If one has a conviction in a particular theme, staying put till the investment thesis fully plays out is the most logical choice. The investment cycle is only now beginning to turn around and such cycles should be measured in years rather than months.
Q. You are underweight in the metal space compared to the rest of the industry. What is driving that view?
This was a miss on our part. We were focused on other opportunities and underestimated the pace of re-rating in this space. Having said that, at current market prices, the margin of safety here is not enough to get us excited.
Q. Small caps make for a third of your portfolio. Will the recent surge in that space alter your view or are you still bullish on that space?
The smallcap space is a very heterogeneous one with vastly different types of companies available for investment. While aggregate valuations have gone up significantly, there are still good opportunities available from a bottom-up perspective.
Q. What inspired you to take up the management of the SBI Contra Fund?
I believe everyone has a temperament that is suited to a particular style of investing. For me, I am inherently drawn towards potential turnarounds, economic cycles, valuation arbitrage which makes it easy for me to embrace contrarian investing.
Q. Who are your role models in this style of investing and any books you recommend that beginners should read?
I really admire investors like Wilbur Ross and Sam Zell who have done a wonderful job investing in cyclical companies.