Fund Focus: Tata Equity P/E Fund

Value conscious all weather equity winner

Sonam Udasi, Fund Manager, Tata MF

14th August 2017

In a nutshell

Tata Equity P/E Fund (no, its not an asset allocation fund - it is a fund that is mandated to have 70% of its portfolio in stocks having lower P/E than the market) has been posting healthy alpha year on year - irrespective of whether value or growth styles are in vogue. A value conscious approach coupled with flexibility to invest upto 30% in promising growth stories that may be valued higher than market averages, and prudent stock picking in both universes, seems to be a winning combination that Sonam has put in place to deliver strong performance year after year.

What do percentiles and their colours signify?

Fund performance is typically measured against benchmark (alpha) and against competition. Performance versus competition is measured through percentile scores - ie, what percentage of funds in the same category did this fund beat in the particular period?

If a fund's rank in a year was 6/25 it means that it stood 6th among a total of 25 funds in that category, in that period. This means 5 funds did better than this fund. In percentile terms, it stood at the 80th percentile - which means 20% of funds did better than this fund, in that particular period. If, in the next year, its rank was 11/26, it means 10 other funds out of a universe of 26 did better than this fund - or 38% of funds did better than this one. Its percentile score is therefore 62% - which signifies it beat 62% of competition.

Most fund managers aim to be in the top quartile (75 percentile or higher) while second quartile is also an acceptable outcome (beating 50 to 75% of competition). What is generally not acceptable is to be in the 3rd or 4th quartiles (beating less than 50% of competition). Accordingly, we have given colour codes aligned with how fund houses see their own percentile scores. Green colour signifies top quartile (percentile score of 75 and above), yellow or amber signifies second quartile (percentile scores of 50 to 74) and red signifies 3rd and 4th quartile performance. A simple visual inspection of colour codes can thus give you an idea of how often this fund has been in the top half of the table and how often it slips to the bottom half. A great fund performance is one which has only greens and yellows and no reds - admittedly a tall ask!

WF: To what will you attribute the significant outperformance of Tata Equity P/E Fund?

Sonam: While the value zone of the market has done quite well in the past one year, it is just one of the reasons for its success. While the fund has benefited from this trend, right sector or stock allocations have also helped it propel returns. The fund has a 13 year plus successful track record. The focus on P/E while hunting for investment opportunities is just the starting point. There are several other tick boxes that we look for, foremost among them being the "secularity" of the business model, whether it can continue to grow profitably for all stakeholders.

WF: How does the P/E strategy work for the fund?

Sonam: The Tata Equity P/E Fund focuses on value through the "Price to Earnings" (P/E) prism. The Fund's mandate is to have at least 70% weight in stocks having P/E which less than 12 month trailing P/E of the Sensex. It does allow 30% weight to be in names that have a higher P/E than the Sensex. So by its construct, the fund is value conscious. At the same time, the fund strategy does have the flexibility to invest in high valuation sectors using qualitative judgment on business models.

WF: Does the P/E strategy make the returns from the fund volatile over a period of time?

Sonam: The fund just completed 13 years since its inception. So it has faced bull cycles of 2005-2007, as well as global rout in 2008. If you analyse the fund performance across time frames, be it 1 year, 3 year, 5 year, 10 year and so on, the fund has always been able to beat the broader indices decently, and has delivered top quartile returns. I hope this clarifies.

WF: What is the proportion of large and midcaps in your portfolio now and how has this changed in the last 12 months?

Sonam: If you analyze the fund's track record over the last few years, large caps have largely been 50-55% of our holdings. Liquidity is an important criterion for us, and scores high while selection. That said, our focus also continues to be to look for investment themes that can create longer term sustainable "value", notwithstanding their current market capitalization.

WF: What are the key themes/sectors you are optimistic on going forward?

Sonam: We believe that it is government CAPEX that will drive investment and economic activity over the next couple of years and thus, companies exposed to this will benefit. Also, with interest rates coming off, consistent cash flow generating (and distributing) companies will see their valuations become richer. Also, we believe that over the next few years the "unorganised to organised" shift would become faster and companies/sectors attuned to that will benefit tremendously. The Tata Equity P/E Fund is built around this view and its factsheet reflects the same.

WF: What is your call on markets over the next 12-18 months?

Sonam: While GST weighs on short term growth of the economy, we believe these measures will lead to a cleaner India balance sheet and wider tax base and thus, higher tax revenue. This would allow the policy makers to continue on the path of infrastructure modernisation, and bring down cost of doing business in the long term. We are constructive on Indian equities considering the growth potential that these measures can unleash. Geo political risks with China in mind is a key risk.

Disclaimer: The views expressed in this article are personal in nature and in is no way trying to predict the markets or to time them. The views expressed are for information purpose only and do not construe to be any investment, legal or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management will not be liable in any manner for the consequences of such action taken by you. Please consult your Financial/Investment Adviser before investing. The views expressed in this article may not reflect in the scheme portfolios of Tata Mutual Fund.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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