Tata Equity Opportunities has had a promising start so far. True to its name, the fund has been quite adept at sighting the opportunities within the equity market and tapping them to deliver superior returns. For instance, it started out with over 60 per cent allocation to large-cap stocks but when the mid-cap led stock market rally took off, it was quick to gauge the underlying opportunity and promptly increase its mid-cap allocation to over 50 per cent.
A highly-diversified equity portfolio dominated by mid-cap and small-cap stocks such as Bharat Electronics, Divi's Laboratories, D-Link and Sundaram-Clayton ensured that the fund rode the broader market rally with panache and delivered a mammoth 195 per cent return during the bull run between April 25, 2003 and January 14, 2004. It outperformed the benchmark BSE Sensex by a huge margin and ranked first in its category, leaving its peers gasping for breath.
But when the bull market ended and a bearish sentiment engulfed the markets, the fund could not replicate its bull market outperformance. A major reason for this was that the fund had pared its mid-cap allocation for large-cap PSU banks and energy stocks but this strategy backfired as these stocks fell more rapidly compared to the mid-caps. As a result, the fund lost a fifth of its value by May 17, 2004.
Within the universe of large-cap stocks, the fund has been very selective and doesn't believe in holding on to them over long periods. For instance, bigwigs such as Reliance, SBI and Infosys have been frequently in and out of its portfolio over the past year.
On the mid-cap front, the fund has adopted a two-pronged approach: buy-and-hold strategy for fundamentally sound stocks such as Divi's Laboratories and Crompton Greaves and get in-book profits-get out strategy for the more volatile stocks.
Overall, the fund has been nothing short of a star performer delivering 123 per cent returns over the whole cycle while the benchmark Sensex rose only 50 per cent during the same period.
However, the fund's short history is far too short for it to build up a real track record. The true test of the fund will be come only when it is able to keep its head above the water when the stock markets are drowning.
This article was originally published on July 20, 2004.
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