ICICI Prudential's Sankaran Naren Advocates Contra Investing in Mid and Small Caps
Sankaran Naren emphasizes the potential of contra funds amid market volatility, focusing on underperforming stocks.
Contra funds have outperformed benchmarks during recent market downturns.
Sankaran Naren highlights mid and small caps as key areas for investment opportunities.
Investors are advised to adopt a long-term perspective when considering contra investments.
Sankaran Naren, Chief Investment Officer at ICICI Prudential Asset Management Company, has highlighted the growing interest in contra investing strategies as Indian equities face a downturn. He advocates for a focus on mid and small-cap stocks that have underperformed in recent years, suggesting that these sectors present significant investment opportunities. Naren's comments come as the Nifty 50 index has seen a decline of 6.06% in September alone, with mid-caps suffering even more severe losses.
The concept of contra investing revolves around purchasing stocks that are currently undervalued or neglected by the market. Naren noted that contra funds have historically performed better than their benchmarks, with an average loss of only 6.62% over the past year, compared to an 11.24% drop in the Nifty 50. Over a three-year period, these funds have delivered an average annual return of 10.33%, significantly outperforming the Nifty 50's 4.18% return.
Naren explained that the strategy involves identifying stocks that have lagged the market for three to five years, with an emphasis on sectors where underperformance is pronounced. He stated, "We see contra opportunities in the mid and small-cap space, as there are many sectors where the underperformance has been pronounced. But the key principle is that we will only buy underperformers."
Despite the potential rewards, Naren cautioned that contrarian investing requires patience, as it may take time for the market to recognize a turnaround in these stocks. He advised investors to maintain a long-term horizon, suggesting that a minimum investment period of five years is advisable for contra strategies. Additionally, he recommended using contra funds as a satellite investment rather than the core of a portfolio, ensuring diversification without excessive overlap with existing holdings.
Looking ahead, Naren's insights suggest that while the market sentiment remains negative, contra funds can provide a structured approach for investors willing to wait for potential recovery. As the ICICI Prudential Contra Fund continues to attract interest, investors are encouraged to conduct thorough research and consider their investment timelines before entering this space.
