Fund Call. Tata Equity PE: Taps opportunity across market spectrum

With the Sensex scaling new highs of over 30,000 points, stock valuations too have become expensive.

For investors wary of taking high risks at this point in time, Tata Equity PE is a good fit. The fund has a mandate to invest at least 70 per cent of its portfolio in stocks whose valuations are lower than that of the Sensex. True to this mandate, the fund’s latest portfolio PE (price to earnings ratio) stands at 17.4 times, at a good discount to the Sensex PE of 22.7 times.

Considering that the fund looks predominantly for stocks with lower valuations than the Sensex, the market bellwether is the benchmark for the fund.

But the fund does not restrict investments to large-cap stocks alone (stocks with market capitalisation of over ₹10,000 crore). It looks for options across the entire market-cap range to build its portfolio. So, if mid-caps offer greater potential at a particular point in time, it pushes up mid-cap allocations to up to 40 per cent of its equity holdings, as it did in 2014.

But there are times, such as the volatile markets of 2013, when mid-cap stocks constituted only half that number. This strategy gives the fund a flexi-cap profile.

Secondly, to protect downsides, the fund also takes cash and debt calls when the markets seem iffy. Compared to 97-98 per cent throughout the 2014 rally, equity holdings have been at 90-95 per cent during the volatility seen in the last two years.

Over one, three and five years, the fund has outdone the category average of multi-cap funds by a comfortable margin of 5-20 percentage points.

It has also returned 11-30 percentage points better than the Sensex over one-, three- and five-year periods. In these timeframes, Tata Equity PE has bettered ICICI Pru Value Discovery, another multi-cap fund that has a mandate based on value.

The fund’s stance indicates cautiousness as per its latest March 2017 portfolio, with equity holdings at around 93 per cent. Considering that valuations of many mid- and small-cap stocks have moved up sharply since the 2014 rally, exposure to this segment has been brought down to 20-25 per cent levels now.

Banking and finance stocks are usually the top sector choices for the fund. Thanks to a fall in borrowing costs and the various measures taken by the government to promote housing, it is currently betting on good growth in the housing finance space by entering relatively lower valued stocks such as Dewan Housing Finance and HDFC in recent times.

The fund does churn its sector choices too, based on valuations. While automobiles/auto ancillaries were among the preferred sectors until a year ago, burgeoning valuations in this space have seen the fund cut down exposures or even exit this space briefly in the last one year. It currently holds lower PE stocks in this space such as Tata Motors instead of, say, a Maurti Suzuki, which is trading at rich valuations.

Headwinds for the software space from the global slowdown and the Trump regime in the US have seen the fund cut down holdings in the segment from about 10 per cent a year ago to 2.5 per cent now. With reforms expected to benefit infrastructure players, power, oil and gas and industrial products are among the fund’s preferred sector bets now.

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