With markets touching new peaks, valuations have also expanded for many stocks. In this scenario, value funds suit investors who look to pick stocks with strong fundamentals at cheaper valuations.
Tata Equity PE is a good fund in the value category. The scheme has a mandate to invest at least 70 per cent in companies whose rolling PE (price-to-earnings ratio) is lower than that of the Sensex. Currently, the fund’s portfolio PE (trailing 12 months) stands at 23.8 times, as against the Sensex’s 32.9 times.
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 at least five years is recommended.
Tata Equity PE 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 during this period.
The fund defensively played the market fall earlier this year by sticking to large-caps. From around 30 per cent in January 2020, its mid- and small-cap exposure came down to 23 per cent by July.
However, considering the run-up in large-caps and the pockets of opportunity available in the mid- and small-cap segment now, allocations to these stocks inched up to 28 per cent by November.
Its defensive approach is also visible in the reduced allocations to the equity segment itself, from time to time. In the meltdown earlier this year, equity allocation came down to 89-91 per cent in March, April and May from 97 per cent in February.
However, once the rally gained steam, the fund increased it equity holdings to about 95- 96 per cent this year.
Good sector churn
Again, the fund rightly latched on to IT as a defensive space this year — exposure here has moved up from under 2 per cent in January to 18 per cent now. Given the high valuation in the space, the holdings have been pruned a bit in the last two months. Wipro is among the stocks where holdings have been brought down.
Pharma holdings were also upped in the early part of this year.
Though stocks of public sector banks were available at beaten-down valuations during the market meltdown, the scheme consciously reduced its holdings in the banking segment well until September. Bank holdings came down to 12 per cent by September from 25 per cent in January 2020.
With more clarity on the impact of the pandemic, following management commentary regarding moratorium, etc, it increased its stake in this space in November to 18.25 per cent. The fund has preferred private banks such as HDFC Bank, ICICI Bank and DCB bank.
Performance and portfolio
Over longer terms of five and 10 years, the scheme has returned on par with, or better than, 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 35-40 stocks in its portfolio. While it tends to hold 5-10 per cent in its top five holdings, the rest are well-diversified.