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A Value Investor

A conservative offering in the equity diversified category, this fund has the potential to gradually 'unlock' the value hidden in the under-valued stocks

While the PE ratio of a stock is one of the most commonly used yardsticks to measure equity investments with, there are two funds-the FT India Dynamic PE Ratio FoF and Tata Equity PE Fund whose investment strategies are based entirely around this measure.The FT India Dynamic PE Ratio FoF, as the name suggests, is a fund of fund. It invests in Franklin India Bluechip and Templeton India Income and determines its equity-vs-debt allocation on the basis of the PE ratio of the Nifty.

Tata Equity PE Fund, on the other hand, is unique in the sense that it employs the ratio to short list individual stocks for building its portfolio. The fund is managed on the value investing philosophy, with the objective of investing 70 per cent of corpus in stocks with a PE ratio less than that of the Sensex at the time of investment.

In the months since its inception, the fund has been building up a portfolio of low P/E stocks, and has sizeable investments in mid- and small-cap stocks. The fund is defensive in the sense that it avoids high exposure to individual stocks, thus maintaining a very diversified portfolio. The sectoral allocation too looks well spread out. Financial services and metals stocks dominate the portfolio. As per the portfolio for month ending August 31, 2005, the two sectors accounted for over 30 per cent of the assets.

During the initial months, the fund's under-performance vis-à-vis the category average was quite understandable as a significant portion of the portfolio had been in cash. But the disturbing fact is that despite that, the fund under-performed the category even in a falling market. For example, during the month of January 2005, the diversified equity category delivered returns of negative 1.36 per cent, while the fund under-performed to deliver negative 2.36 per cent, despite the fact that it had in excess of 15 per cent of its assets in cash. Quite similar was the case in March 2005 as well. By June 2005, the fund has deployed majority of its assets in stocks, as the cash component has come down to 4.72 per cent. However, value-investing is a long-term game and it's surely too early to judge this fund yet.

One good thing about this fund is that the objective of the fund mandates it to invest 70 per cent of its assets in low P/E ratio stocks. The remaining 30 per cent window provides it with much-needed freedom to invest into growth stocks whenever the fund manager spots the right opportunity. This tends to provide a good balance since in its absence, the fund would have found it difficult to invest into sectors like technology where the P/E ratios tend to be on the higher side.

The fund has invested in some widely-held stocks like ONGC and Hindustan Petroleum. However, lesser known names like Navin Flourine International also figure among its holdings. But the fund's strategy to keep stock-specific exposure under check negates the risks associated with investing in mid- and small-cap stocks, and provides a conservative look to the portfolio.

Though its still early days, but the fund does not seem to be suited to those who are looking for flamboyant returns. Rather, the fund would appeal to those who are looking for a conservative offering in the equity diversified category, having a diversified portfolio, and which has the potential to gradually 'unlock' the value hidden in the under- valued stocks of today.