Tata Equity PE: Time to ride this dark horse

A sharp run-up in valuations based on high expectations and lack of matching earnings growth, has increased the downside risk for many stocks today.

If cyclicals, such as auto, auto ancillaries and banking were over-fancied in 2014, defensive themes, such as pharma and software, have had their time under the sun in the 2015 volatility.

Tata Equity PE is a good dark horse fund to bet on in such market conditions.

The fund has trimmed its holdings in many of these in-vogue sectors and is instead focused on segments, such as power, construction and capital goods that are beaten down today. The fund has a mandate to invest 70 per cent of its portfolio in stocks whose trailing price to earnings (PE) ratio is less than the Sensex.

It thus, zeroes in on stocks with low valuations as of now, but with potential for growth over the medium to long term.

This style of investing suits investors who cannot stomach high risk and are willing to wait it out for at least three years for the fund to deliver.

Strategy and performance Considering that the fund looks predominantly for stocks with lower valuations than the Sensex, the market bellwether is the benchmark for the fund. But that does not mean that the fund restricts itself to large-cap stocks. It roves across the entire market cap range to build its portfolio.

So, if mid-caps offer greater potential at a particular point in time, it has pushed up its mid-cap allocation to 45 per cent of its equity holdings, as it did in 2014.

But there are times, such as 2013, when mid-cap stocks constituted less than half of that, at around 20 per cent.

This strategy gives the fund a flexi-cap profile. To its credit, the fund’s returns over longer periods of three and five years beat the category average of multi-cap funds by 2-4 percentage points.

It has also returned 6-10 percentage points better than the Sensex over one-, three- and five-year periods. Over these periods, Tata Equity PE has bettered the Quantum Long Term Equity, a fund which follows a similar value-based approach.

Portfolio At 16.1 times, the fund’s portfolio PE multiple is comfortably lower than the Sensex’s 20.5 times. While it has brought down its mid-cap allocations from the peak of 45 per cent it held in 2014, it has still benefitted from the mid-cap rally by holding around 35 per cent in this space this year.

The fund has managed market volatility well by pushing up its cash and debt allocations. Compared to 97-98 per cent throughout 2014, equity holdings have been at less than 95 per cent throughout this year.

Alterations in its sector holdings in recent months reflect the fund’s value leanings. Holdings in construction, capital goods and power stocks have stood steady at around 5-8 per cent over the last few months. Bharat Electronics, Power Grid, KNR Constructions, MBL Infrastructure, JK Cements and Finolex Cables are some of the stocks it holds in these sectors. Holdings in banking stocks have been brought down to 13 per cent now from 20 per cent in January 2015.

Auto and auto ancillary holdings have been trimmed too, and the fund has shown preference for low-PE stocks, such as Tata Motors, Tata Motors DVR and JK Tyre. Idea Cellular and Aditya Birla Nuvo are recent entrants.

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