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As the stock market touches new highs, even a minor disappointment is sharply pulling down many stocks. More so, if these stocks are perched at high valuations. If you wish to play it safe in such times, Tata Equity PE, a value-oriented fund, is a good fit. The fund has a mandate to invest at least 70 per cent in equity and equity-related instruments of companies whose rolling PE (price-to-earnings ratio) is lower than the rolling PE of the Sensex.
The Sensex is the benchmark only for valuation purposes. To choose stocks the PE of which is lower than that of the Sensex, the fund casts its net wide across market capitalisations. This gives it a flexi-cap profile. So, if mid- and small-caps offer greater potential at a particular point in time, the fund pushes up allocations to this segment to 35-40 per cent of its holdings, as it did in late 2013 and 2014.
Value picks
However, high valuations in the mid- and small-cap space have seen the fund gradually cut down its holdings in the space in the past one year, from 25 per cent in May 2017 to 10 per cent now. Rather than go for high-growth, high-valuation stocks, the fund consciously picks stocks with lower valuation which have a potential to outperform over the longer term. Thus, even as the market rallied in 2017, the fund reduced mid-cap and even equity exposure. Hence, its one-year returns trail the benchmark. But the fund has beaten the Sensex convincingly over three- and five-year periods.
Tata Equity PE churns its sectors well based on market conditions. With bank stocks taking a beating due to burgeoning bad loans, the fund has preferred stocks of finance companies over banks in the last year. It also scores on asset allocation, increasing debt/cash holdings in uncertain market conditions.
Portfolio
The fund has adopted a defensive approach to tackle the current volatile market conditions. In its June 2018 portfolio, the fund held only 88 per cent in equities, mostly large-cap stocks. It usually holds a diffused portfolio of about 50 stocks. In the last few months, Tata Equity PE has increased concentration in its top three holdings — HDFC, YES Bank and Reliance Industries — from 4-6 per cent levels to 7-9 per cent levels. Its current portfolio PE (trailing) stands at 17.7 times versus the Sensex’s 23.3 times.
The fund has upped stakes in the auto sector this year. While it has pruned holdings in richly valued stocks such as Maruti Suzuki, it has increased it in more attractively valued ones such as Mahindra and Mahindra.
Given the rupee depreciation and the improving prospects for software companies, holdings here have been increased to 5 per cent now, from 1-2 per cent in the last few months of 2017.
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