The stock market has been in a positive spirit in recent times following the easing of the Covid-19 lockdown.
However, considered in the light of the correction since February 2020 and also the uncertainty regarding the impact of Covid-19 on earnings, the market could continue to remain volatile in the near to medium term.
This gives room for value-investing, where funds could pick stocks with strong fundamentals at cheaper valuations.
Tata Equity P/E is a good fund in the value category. The scheme 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 that of the Sensex. The Sensex is the benchmark only for valuation purposes.
To choose stocks whose PE is lower than that of the Sensex, the fund scouts for stocks across market capitalisations. This gives it a flexi-cap profile.
Given that value-investing may take time to pay off, an investment horizon of 3-5 years is recommended.
Strategy
Tata Equity P/E alters its market-cap preference based on market conditions, with an eye on valuations as well.
For instance, high valuations in the mid- and small-cap space in 2017 and 2018 saw the fund gradually cut down its exposure to this segment in this period. The fund has played the current market fall defensively, by sticking to large-caps.
From around 30 per cent in January 2020, its mid- and small-cap exposure has come down to 25 per cent as of April 2020. Its defensive approach is also visible in the reduced allocations to the equity segment itself, from time to time.
During the polarised market conditions in the past 1-2 years, the scheme took active cash/debt calls of up to 15 per cent of its portfolio. In the current meltdown, equity allocation has come down to 89-91 per cent in March and April from 97 per cent in February.
Sectors are also churned well. For example, the fund rightly caught on to the auto space in 2017, when the sector was doing well, and gradually reduced its holdings since mid-2018, when the sector began feeling the heat from a rural slowdown as well as the NBFC crisis.
However, given the depressed valuations in this space now after the corrections, exposure to auto has been moved up slightly in the past few months.
The scheme has increased its holdings in Bajaj Auto, and also added Eicher Motors.
Though stocks of public sector banks are available at beaten-down valuations, the fund has consciously reduced holdings in the banking segment in the last two months. Bank holdings have come down to 16 per cent now from 25 per cent in January 2020.
It holds 5-6 per cent each in HDFC Bank and ICICI Bank and about 1 per cent each in Kotak Mahindra bank and DCB Bank now. Most banks are expected to see a rise in bad loans due to Covid-19.
Performance and portfolio
Over longer terms of five and 10 years, the fund has beaten the broader S&P BSE 500 index by 1-2 percentage points. Over these time periods, its performance has been on par with, or better than, peers such as L&T India Value and Aditya Birla Sun Life Pure Value.
The fund has about 40 stocks in its portfolio. While it tends to hold 5-10 per cent in its top five holdings, the rest are well-diversified. Currently, it holds 11.7 per cent in Reliance Industries and 9.5 per cent in HDFC.
nfosys, Mahanagar Gas and Tata Consumer Products (carved out from Tata Chemicals) are recent additions; Future Retail, Ashok Leyland and IndusInd Bank are recent exits. The fund’s portfolio PE (trailing 12 months) stands at 17.76 times, as against the Sensex’s 21.48 times.