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WF: The phrase "Equity P/E Fund" is usually associated in the market with a P/E based asset allocation fund. Does your fund also perform a similar function or does it connote an investment style in equities that focuses on valuations?
Sonam: The Tata Equity PE 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 rolling P/E of the Sensex. It does allow 30% weight to be in names that have a higher P/E than the Sensex.
Click here to know more about percentiles and the colour codes
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: The last 5 years have seen a phenomenon where high P/E stocks have by and large outperformed markets consequent to a huge chase for quality stocks in a sluggish economy. The two years which saw a cyclicals led rally - 2014 and 2016 - are also the years your fund has done very well vs peers. Should advisors view your fund as a proxy to the cyclicals story, given that cyclicals generally anyway trade at lower PEs compared to defensives, and therefore will likely always qualify within your consideration set?
Sonam: While the value zone of the market has done quite well in this calendar 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 10 year plus successful track record. If it was only betting on cyclicals, I don't think the fund's strategy would have been able to demonstrate enduring success. 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: Are cyclical oriented funds better advised at the early stages of an economic cycle and perhaps best avoided as the cycle matures?
Sonam: Actually cyclical funds nowadays depend on the global environment and global economic activity. The economic activity in India versus the globe may be at odds with each other considering global cycles which are increasingly getting shorter. In our view, it is better to allocate investments based on secular growth themes which have the ability to outperform over the long term.
WF: Your fund has a couple of trigger options - can you please take us through these options and help us understand how investors can best use them?
Sonam: The scheme has two dividend trigger options.
Dividend Trigger A - Under Dividend Trigger A, the Fund will initiate the declaration of dividend in the current calendar quarter when there is an appreciation in the NAV from the last Ex-dividend NAV by 5%.
Dividend Trigger B - In case of Dividend Trigger B, the Fund will initiate the declaration of dividend in the current calendar quarter when there is an appreciation in the NAV from the last Ex-dividend NAV by 10%.
No dividend will be declared if the NAV does not reach to the trigger level & irrespective of the Appreciation level of the NAV. Not more than one dividend will be declared in a particular calendar quarter. In case there was no dividend declared in the immediate preceding quarter then the last declared Ex-Dividend NAV shall be taken as a base to check for 5% and 10% appreciation. All dividends are at the discretion of trustees and subject to availability of distributable surplus.
How Investors can benefit from them
Dividend Trigger option is like an automatic Cashing in mechanism at given appreciation levels by way of dividends which are automatically initiated upon Trigger. Long term investors can opt for such triggers to continue to maintain their long term holdings and at the same time cash out partially by way of dividends when the respective appreciation in NAV occurs by way of triggers.
WF: What is the proportion of large and midcaps in your portfolio now and how has this changed in the last 12 months? Is this composition an active consideration in portfolio construction?
Sonam: If you analyze the fund's track record over the last few years, large caps have largely been 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 most optimistic of going forward? What are your biggest active bets and why?
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 in the context of the current disruption from demonetization and going forward the challenges and opportunities from GST implementation?
Sonam: While demonetization and upcoming GST will weigh 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.
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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Fund Focus: Tata Equity P/E Fund
