The Hindu Business Line : Tata Equity P/E Fund: Hold

AFTER a fairly good start in the first six months after its launch, the performance of Tata Equity P/E fund has deteriorated. The decline over the past year, however, need not cause undue alarm.

A number of funds with a large-cap value orientation, such as Templeton India Growth and Birla Dividend Yield Plus have also delivered returns inferior to that of the index.

Given that the Tata Equity fund's investment strategy has the potential to deliver reasonable returns over a longer period, investors can stay with the fund. If investors have invested a substantial proportion of their portfolio in this fund, they could consider diversifying by shifting a portion to funds such as Templeton India Growth or Birla Dividend Yield Plus.

Tata Equity P/E's strategy is to invest 70 per cent of the portfolio in stocks with a P/E that is lower than that of Sensex. The rest could be invested in stocks with a higher P/E, too. The premise behind the strategy is that low P/E stocks would generate higher returns over a longer term. This has been empirically tested in the past. Past performance, however, need not be sustained in future.

Performance: Tata Equity PE has registered returns of 55 per cent in the past year. During the same period, S&P CNX 500 registered returns of 65 per cent.

Schemes such as Templeton India Growth, Birla Dividend Yield Plus and UTI Master Value have also registered returns that are similar to this fund.

Portfolio: The number of stocks in the portfolio is high — 48 at the end of June 2005. The fund is, however, not extensively diversified.

The top ten stocks account for about 40 per cent of net assets, which makes it a concentrated portfolio.

Exposure to stocks of companies whose earnings are cyclical, such as those in commodities, banking and capital goods, was high relative to other sectors.

The proportion of oil and banking sector stocks, however, was lower relative to their weights in indices such as S&P 500.

A significant proportion of the net assets had been invested in large-cap stocks. Normally, a low P/E fund would have invested a substantial proportion in mid- and small-cap stocks.

Given the sharp run-up in the prices of such stocks over the past two years, however, a low P/E fund would find less mid-cap stocks to invest in.

This could partly explain the scheme's large-cap bias. If this large-cap bias persists, this low P/E fund may not necessarily turn in a substantial outperformance.

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