Outperformance is not a reason to sell a stock

Invesco India Contra Fund has a good track record. But the fund's portfolio doesn't look very different from the portfolios of other growth funds. What is the reason for this? At any given point in time, we strive to maintain at least 60 per cent of this fund's portfolio in contrarian opportunities. Today, in fact, 69-70 per cent of our portfolio is in contrarian opportunities. We look for three types of contrarian opportunities. The first is companies which are in a turnaround phase. These are companies that were very strong in the past but for some reason have fallen on bad times. There is often a change in management which tries to chart a path to profitability. If you can identify such opportunities, there is often a benefit that can come out of both earnings growth and P/E re-rating. In the current portfolio, companies in a turnaround phase have a 20 per cent allocation and include stocks such as India's largest spirits company, India's leading private-sector bank and India's largest hospital chain. A second bucket, 31 per cent of the portfolio today, relates to companies trading below their fair value. Here, the main buying criterion is the stock's cheapness relative to the market, based on price-to-book, price-to-earnings or other parameters. A couple of years ago, IT companies were cheap relative to markets, today many auto companies fit the bill. A third bucket we like to own is derated growth companies. Sometimes, companies that deliver high growth get derated due to short-term or technical reasons. Maruti getting de-rated because there was a strike a few years ago or HDFC Bank getting derated because of FPIs hitting their investment ceiling are examples. If we feel such a derating is due to short-term reasons, we take advantage. In the current portfolio, companies like Exide Industries fit this description. Today 17-18 per cent of the portfolio belongs here. Generally, I find that not many contrarian or value funds focus on derated growth companies, because these stocks are never cheap