It’s not easy to see what distinguishes one fund from the other. In fact, listing the similarities between the two is a much easier task. Despite having the same fund manager, falling in the same category classification and having the same expense ratio, there could be differences in investment strategies. But that is not the case here. Or more accurately, it no longer is.
The similarities between Tata Growth and Tata Mid Cap are numerous.
The top four sectors (Financial, Healthcare, Services, Engineering) are identical, even their percentage allocations are almost similar. The portfolios sport the same number of stocks; Tata Growth currently has 52 stocks and Tata Mid Cap, 50. Out of these, a shocking 47 stocks appear in both portfolios. Neither of the funds have any debt exposure but their equity exposure is between 92 and 94 per cent. And, unfortunately, both funds leave much to be desired in terms of performance.
Tata Mutual Fund has four funds that fall into the ‘Equity: Mid & Small Cap’ category, the way Value Research classifies it. Tata Select Equity and Tata Dividend Yield are the two other funds and they have put up some good numbers in the past. The same cannot be said for the two being mentioned here. Over the past five years, Tata Mid Cap and Tata Growth have not been top quartile annual performers. They have had their moments when they fall in the second quartile slot, but it is usually at the bottom of the ladder. In 2006, both the funds delivered virtually identical returns and grabbed two consecutive slots in the ranking. But the very next year, Tata Growth shot ahead and got ranked 14 (out of 41) while Tata Mid Cap languished at 30. In 2009, Tata Mid Cap was the better performer but once again gave way to its sibling in 2010. When compared with Tata Mid Cap, Tata Growth appears to be the better fund in terms of overall returns. But when the comparison is done with other funds in the ‘Equity: Mid & Small Cap’ category, there are plenty of better options available for investors.
Tata Growth never started off this way. Being a much older fund, it has a long history. It was an ‘Equity: Large & Mid Cap’ offering for nine years before falling in the ‘Equity: Multi Cap’ slot for a brief period. During those 10 years (1994-2004), it did put up a pretty good show on and off. In fact, in 2004 it was a top quartile performer. It was only from 2005 onwards that it began to get classified under the ‘Equity: Mid & Small Cap’ category. However, in one aspect it does stand apart from Tata Mid Cap. Despite being categorized as a mid- and small-cap fund, its allocation to large caps is more than that of its sibling. This was all the more apparent in 2008. That year, Tata Mid Cap bravely restricted its large-cap allocation to a maximum 14 per cent and stuck to smaller fare. Tata Growth’s large cap allocation peaked at 37 per cent.
In terms of asset allocation, both funds follow similar bents and plunge into cash if there is a need. At the start of 2009, the equity allocation of both was between 71 and 74 per cent. Though they wasted no time in hiking the equity exposure when the market began to rally, they failed to wow with their performance. Though Tata Mid Cap delivered a return of 103 per cent that year, it was still a bottom second quartile performer and beat the category average by a small margin. Tata Growth underperformed the average (blame it on the higher large cap allocation) with a return of 91.64 per cent (category average: 98%).
Both funds hold diversified portfolios. Ever since 2006, Tata Growth has moved between as little as 27 stocks to as many as 55. Tata Mid Cap tends to be even more diversified with the record at 32 to 68 stocks. However, such similarities did not always exist. If one looks at the portfolios in 2006, Tata Growth tended to have a much smaller number of stocks and a more compact portfolio as compared to Tata Mid Cap. Also the sector bets were completely different. Take for instance, January 2007. That month, Technology cornered 22 per cent of Tata Growth’s portfolio. The corresponding allocation in Tata Mid Cap was just 4.39 per cent. By the end of that year, Diversified had a 16.55 per cent allocation to Tata Growth while the top sectors in Tata Mid Cap were Metals (19.47%) and Services (19.41%).
You won’t find strong stock bets in any of these funds. Over the past five years, the highest stock allocation has not been more than 6 per cent (Infosys Technologies, Mercator Lines) in Tata Growth and the same at Tata Mid Cap (Indian Hotels, Colgate Palmolive (India), Summit Securities). While such diversification does provide some amount of safety, an investor would be paying a high price for that. Neither has any impressed by way of returns.
Whatever be the reason, the two funds which treaded on different paths began to starkly resemble each other a while back. Now, it is difficult to tell one from the other. That is probably the reason why Tata Asset Management Company has proposed to merge Tata Mid Cap with Tata Growth. The application to do so is currently being looked at by the Securities and Exchange Board of India (SEBI). Going by the desire of SEBI to lower the number of schemes in a fund house that resemble each other, the permission to merge the two schemes will surely be granted. With the impending merger in mind, the AMC might as well have similar portfolios.
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