Tata Equity P/E Fund – wait and watch

Swapnil Suvarna finds that Tata Equity P/E Fund has performed decently but is concerned about the changes in fund management. 

Launched on June 2004, Tata Equity P/E Fund is benchmarked under Sensex. The fund invests up to 70 per cent of its net assets in undervalued stocks i.e. stocks with a price to earnings ratio (P/E) less than that of Sensex. Other than the P/E criterion, the fund management also looks at fundamental factors like management & business competitiveness and growth prospects. The fund is being managed by Bhupinder Sethi since February 2011 who had managed it earlier from March 2005 till May 2008. During the interim period, the fund was managed by Sachin Relekar.

Performance Analysis

Since inception, the fund has registered a CAGR of 25 per cent against a CAGR of 21 per cent of its benchmark in spite of frequent changes in the fund management. Over various market cycles, the fund has outperformed its benchmark but has generated modest alpha. Though the fund management saw a change during the 2008 recession, the fund managed to arrest its downfall but generated a loss of one percent relative to its benchmark.

Portfolio Analysis

The fund has been investing in value stocks and taking advantage of the difference in the price between the market value of a company and the intrinsic value of the business. The idea behind the strategy is that stocks with low P/E generate higher returns over a longer term.  Over the years the fund has mainly held high exposure in undervalued mid- and small-cap space relative to its benchmark.

In a short span, the fund management has changed twice, resulting in reshuffling of the entire portfolio. Such moves can hamper the fund’s performance even though the fund manager has maintained a decent track record in the past.

Currently the management has maintained a diverse portfolio of around 60 stocks across sectors like IT, oil exploration, banks, cements & construction material, refineries, pharmaceutical, auto and power generation. In volatile market conditions, the fund’s exposure to mid- and small-cap space led to marginal losses relative to its benchmark. However, in the year 2009 during the market pullback, the fund’s significant exposure in stocks from sectors like auto ancillary, gas transmission/distribution, banks and IT software helped it to outpace the Sensex.

Overall the management’s strategy of value investing and occasional profit booking has helped the fund to outperform its benchmark satisfactorily over a long term.

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Though the fund has produced decent returns, the frequent change in fund management is a major drawback. During Bhupinder Sethi’s earlier stint as fund manager, the fund had underperformed the benchmark by 12 per cent in the period between 1 April 2005 and 7 February 2007 – a period that characterized the bull phase. However, the performance improved later and when taken for the entire period in his earlier stint, the fund performance was similar to the benchmark. Hence, we suggest you to watch the fund performance closely as the current fund manager has to continue managing this fund for a longer period and generate alpha.

In response to this Fund Analysis, Tata AMC has stated the following:

1.       Mr. Sachin Relekar managed the fund even as Mr. Sethi continued to mentor him as a senior member of the fund management team

2.     During Mr.  Sethi’s earlier stint as fund manager, the fund performance for the period from 15^th March 2005 to 30^th June 2008 was 24.40% CAGR outperforming the benchmark BSE Sensex 22.95 % in a period that saw markets primarily in a bull phase. It was during Mr. Sethi’s fund management tenure that in the calendar year 2007, the fund figured in Lipper’s top 100 best funds in the world.

3.      The performance of the Fund has continued to be robust, outperforming the benchmark. As of 14^th July’11, over the last 5 years, the Fund is ranked 6^th out of 136 equity diversified funds.