On the face of it, the objective is straightforward - to scout for undervalued companies. But what sets Tata Equity PE apart is the specific criterion that helps define undervalued. It invests in stocks that have a trailing P/E ratio less than that of the Sensex at the time of investment. So, for example, let's take the trailing P/E of the Sensex at 22.67 (April 29, 2006). For an investment to be made on May 2, 2006, the trailing P/E of the stock as on the previous trading day (April 29, 2006) would be compared with the trailing P/E of the Sensex. On that day, the rolling P/E ratio of Wipro was 36.7 and that of ONGC was 12.99. So ONGC could be included in the portfolio, but not Wipro.
It would be very limiting if the fund manager did not have some leeway. And he does. None of the stocks have to be Sensex constituents or even large caps. In fact, a fair amount of the portfolio is currently centred on mid caps. Moreover, a maximum of 70 per cent of the stocks would be selected based on the P/E criterion with the balance being any stock of the fund manager's choice. So, if the fund manager wanted to buy Wipro on that day, he could under the 30 per cent upper limit. The fund house likes to position this fund as an all-market offering which works well in bull and bear markets since the P/E filter limits the downside risk. The very mandate of this fund is to provide a margin of safety when valuations have begun to scare. But the real challenge lies in the ability to focus on smart bottom-up stock picking. The trick is not so much as buying a great stock, but buying it at the right price.
A look at the performance will explain. In 2005 it was ranked 73 (out of 100) and the next year it was ranking 98 (out of 145). But this poor performance was more a function of the market than a testimony to the fund manager's skills. Launched in June 2004, this fund obviously had a tough time keeping up with its growth-oriented peers. But in the longer run, it has paid off. Its year-to-date performance (as on November 30, 2007) of 64.19 per cent puts it way ahead of the category average (45.28 per cent), the Nifty (45.29 per cent) and the Sensex (40.45 per cent). This could be the result of value stocks coming back in vogue. But it also appears that stock picking paid off.
Early last year, the fund began stocking up on the ferrous metals sector. In April 2006, the fund had a 22.5 per cent allocation to metals while the category average was just 8.33 per cent. When metal stocks were getting hammered, stocks like TISCO and SAIL were picked up at attractive valuations. PSU banks like Bank of Baroda and Indian Overseas Bank were also picked up last year. When the category average to the financials sector was almost 9 per cent (October 2006), this fund had a 15.27 per cent allocation to it.
While it tends to take concentrated sector bets, it does not take huge stock positions. Compared with some other schemes from Tata Mutual Fund, this one has a slightly smaller, but nevertheless quite large, portfolio of around 40 stocks. A good value fund for one's portfolio.
This article was originally published on January 16, 2008.
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