Contrarian investing, when done with a strong valuation alignment, can be very powerful even while investing in thematic mutual funds. This is especially true in beaten-down themes where market consensus is completely against a particular theme.
Often, the valuation itself acts as a natural defense against any further downside and later becomes a driver of good returns. But nobody even bothers to look at thematic funds when they are out of favour. Most existing investors in such thematic funds look to sell out even near the bottom. Yet, that’s exactly when these funds become excellent buys.
In recent months, several themes have fallen out of favour and kept hitting lows. The tech funds focusing on information technology companies were one of the biggest losers in this calendar year. Valuations were near their lows just two weeks ago. Before that, private bank-heavy financial services funds were trading near their lows.
Taking a stance against the market consensus and buying such themes near the lows requires solid conviction and a strong contrarian bent. Markets reward contrarian conviction, and investing in such themes will help investors significantly raise their overall mutual fund portfolio returns.
The current market is offering multiple opportunities in large-cap, blue-chip-heavy thematic funds and helps investors take asymmetric thematic bets in their portfolios. These bets have the potential to reward investors significantly better than any of the existing favourite themes, where everybody is chasing the market consensus.
