Friday, July 11, 2014
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The asset allocation funds which take exposure in other equity or debt funds basically fall under "fund of funds" product category. The Tata Equity P/E Fund is a multi-cap fund with bias towards value style of investing. The fund predominantly invests directly into shares of companies whose trailing 12 month P/E (price/earnings ratio) is lower than Sensex trailing P/E. So compared to the "Fund of funds" product category which takes call on markets for equity or debt allocation, our fund remain invested in equities to a large extent within the mandate of investing in low P/E companies.
The mandate of the fund makes it to follow "value oriented" investing style. Since the start of the year, because of improvement and stability in macro-economic parameters globally as well as domestically along-with stable political mandate, the confidence about prospects of economic growth in the markets has improved sharply. In such situations, value stocks outperform broader markets significantly as various expected triggers to improve company performance in future drive their re-rating from depressed levels of valuations. During the last one year higher exposure to IT sector worked for the fund. In the later part, higher exposure to banking & finance, selective exposure to capital goods, road construction and EPC companies benefitted the fund.
During last 4 years, value style has underperformed the growth style of investing. During the uncertain and recessionary period, market ignored value and chased growth stocks where earning and growth visibility is better even at higher valuations. Actually value stocks has corrected considerably in absolute terms. We focused on staying invested in better quality companies from sectors like IT and private banks during that time to maintain the margin of safety and tried to avoid absolute correction. IT sector picks generated good amount of alpha for the fund during CY13. During the recent rally, value stocks did very well and timely exposures taken in some of the banks, capital goods, construction and EPC companies worked very well for fund.
Value style continues to do well during extended periods of economic recovery. Value as well as growth style of investing can co-exist and both can perform if the market trend is of gradual upward trajectory which we believe is the case going to be. During such period of economic recovery, many companies gradually convert from a small/mid-size player to mid/large size company and typically such companies' stocks undergo P/E re-rating. Also even if some of the companies' which continue to trade at similar P/E level provide earnings related returns as in the end stock returns track earnings growth
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