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

Unitholders can retain their holdings in Tata Equity P/E. The fund has delivered impressive returns over the past year. It is however, yet to build a long-term track record in value investing.

While growth stocks have outperformed in this bull rally, there is a place for a value fund in one’s portfolio. Tata Equity P/E appears to have a better three-year track record than other dividend yield funds. It can, therefore, remain a part of your overall fund portfolio.

Lower relative valuations: Tata Equity P/E follows a value investing style. This involves unearthing stocks that are trading at a discount to their intrinsic value or in other words buying fundamentally sound companies whose stock price is temporarily depressed.

Most value funds in India practice this investing philosophy by buying into stocks with a high dividend yield. Tata Equity P/E however, differs from its peers, as it focuses on the earnings multiple at which a company trades, rather than its dividend yield.

Basically, the fund invests in stocks whose price-earnings multiple (measured as the latest market price of the stock divided by the company’s earnings per share for the latest completed financial year) is lower than that of the Sensex.

Tata Equity P/E also has the mandate to invest up to 30 per cent in stocks with a multiple higher than the Sensex. This is to take advantage of situations such as turnarounds or expectations of a substantial improvement in profitability, where the trailing multiples may not be representative of a company’s prospects.

Suitability: All things being equal, a stock with lower valuations is exposed to lower downside from earnings disappointments and generally offer a better cushion against sharp market declines.

By investing in stocks with lower price earnings multiple relative to the index, the fund tries to contain downside, even as it homes in on candidates that are ripe for a valuation re-rating.

However, the fund may not be ideally suited for those who look for substantial capital appreciation. For the most part of the bull market, money has chased growth stocks, which typically command high relative valuations.

Stocks with lower valuations have, however, been looking up in recent times and the fund may be suitable for those who are looking for a diversification option. Investors can also consider switching from dividend yield funds to Tata Equity P/E.

Performance: Tata Equity P/E has delivered a return of 68 per cent over the past year, matching the returns of the MSCI India Value Index. Its performance beats its value fund peers and, in fact, places it among the top 20 diversified funds over a one- year period.

The focus on lower valuations appears to have worked in its favour. Picks such as Balaji Telefilms, Century Textiles, CRISIL, Ratnamani Metals, TV Today and Tata Power have helped the fund outperform.

The current portfolio is concentrated in ferrous metals, banking and cement.

The fund also takes measured exposures to stocks, with the top ten holdings accounting for about 46 per cent of its assets. With a small asset base of Rs 135 crore, the fund maintains a compact portfolio of about 40 stocks.

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