VR Logo

Belligerent Predator

Tata Equity PE makes for a good aggressive bet

With a mandate to scout for undervalued companies, one would think this fund is a safe bet in market downturns. But that has not been the case. From the market peak to the fall, the fund is down over 50%, in line with the Sensex and the category returns.

To know whether this fund makes for a good investment or not will rest on your understanding of the objective. It invests in stocks that have a trailing P/E ratio less than that of the Sensex at the time of investment. This very definition makes it difficult for the fund manager to pack his portfolio with large caps. Consequently, he gravitates towards mid- and small-caps. As a result, almost 60% of the current portfolio is in such stocks.

Don’t expect a value based portfolio here at all times. The fund manager may pick low PE picks but it does not mean he will sell them when it goes up. Also, just 70% of the fund’s portfolio will be restricted by this mandate, he has a free hand with the balance 30%.

Such a portfolio held it in good stead during the bull run (June 15, 2006 to January 8, 2008) with an absolute return of 85.77%, as against the Sensex return of 64.76%. The fund manager also took his picks in sectors which were on the rise - metals, financial services, energy and services. That’s how it managed to trounce the competition in 2007 with a return of 83.60%, way ahead of the category average and Sensex return.

The risk of a mid- and small-cap heavy is mitigated to some extent with the attempts of the fund manager to opt for a diversified portfolio. He does not take huge bets and goes with around 40 stocks, no single one accounting for more than 5% of its net assets. But he takes concentrated sector exposures, with the top 3 sectors accounting for nearly 55% of its net assets.

This fund has proved its point in the rising market and displayed its vulnerability in a falling one. If you are happy with that, go for it.