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Investors can buy units of Tata Equity P/E fund (Tata PE), given its ability to be a steady performer over the long-term with investments largely linked to valuations.
The fund’s mandate is to invest at least 70 per cent of its portfolio in stocks that have rolling price earnings multiple that is lower than the Sensex. This process has helped the fund over the long term as it does not hold on to any momentum-based or overheated stocks and sectors for too long. Tata PE has managed to outperform the Sensex benchmark over one, three and five-year periods. The margin of out-performance has been to the tune of 2-4 percentage points.
The fund has substantial exposure to mid-cap stocks, which increases its risk profile. But being anchored in valuations, it has been able to ride out volatility quite well. Barring 2008, when it fell by almost as much as its benchmark, the fund has done better than the Sensex during market rallies as well as corrections over the past five years.Tata PE may be suitable for investors with a moderate risk appetite looking for a little more than what the indices can deliver. It can be a suitable addition to the portfolio for the purpose of diversification.
Investors can also take the SIP (systematic investment plan) route to taking exposure in the fund.
Portfolio and strategy
Tata PE invests predominantly in large-cap stocks, taken from the Sensex, Nifty and BSE 100 baskets. But across market cycles, the proportion allocated to mid-cap stocks (less than Rs 7,500 crore market capitalisation) has been 25-40 per cent.
The valuations have always remained at or lower than the Sensex’s trailing price earnings multiple. Currently, the fund’s portfolio has a PE of 15 times, which is marginally lower than that of the Sensex. Being anchored in valuations, Tata PE delivers steady rather than spectacular returns.
Software has consistently remained the top sector held over the past few years. But the other significantly held sectors barring banks have been churned frequently and- trimmed, when they run up substantially.
Betting on autos, banks and software in 2009 helped the fund participate in the rally. The fund then trimmed exposure to the first two sectors mentioned above as valuations turned expensive. Having lower exposure to consumer non-durables, especially over the last 12-18 months, did drag returns. The sector’s PE is at a substantial premium to the broader markets and it remains to be seen if it would be justified by earnings potential in the future.The fund maintains a compact portfolio of 50-55 stocks without too much concentration. Over the past one year, it has exited 18 stocks, while buying into just 10.
Overall, Tata PE is suitable for valuation-led investment over the long-term, say, five years.
The NAV for each unit of the growth option is Rs 47.9.
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