Tata Equity P/E Fund: Gaining through Value-Conscious Approach

Launched more than two decades ago in June 2004, Tata Equity P/E Fund is a Value Fund with an impressive long-term performance record. The fund focuses on buying high-quality stocks with strong growth potential that are available at attractive valuations. Tata Equity P/E Fund uses the Price to Earnings (P/E) ratio as the key parameter to identify and shortlist attractively priced stocks for the portfolio. Subsequently, the fund employs other quantitative and qualitative parameters to determine the investment-worthiness of the selected stocks and to avoid value traps. Its focus on undervalued stocks that have the potential for future earnings growth enables it to achieve a decent alpha over the long term.

Tata Equity P/E Fund adopts a market cap and sector-agnostic approach, allowing the fund manager to make portfolio adjustments based on the potential of the underlying stocks, market caps, or sectors. The fund has done well under the supervision and expertise of Mr Sonam Udasi who focuses on the growth potential, diversification, and liquidity aspects to create a high-conviction portfolio. Notably, Tata Equity P/E Fund underperformed the benchmark during CY 2020 and CY 2021 due to its low exposure to certain sectors that drove the rally in the broader index. However, from the CY 2022 onwards, the fund has demonstrated remarkable improvement in performance, securing a spot among the above-average performers in the Value Fund category.

Over the past five years, Tata Equity P/E Fund has grown at a compounded annual rate of 22.8%, outperforming its benchmark, the Nifty 500 - TRI, which delivered a 20.5% CAGR. An investment of Rs 10,000 investment in Tata Equity P/E Fund five years ago would now be worth Rs 27,992, compared to Rs 25,403 in the benchmark index.

Tata Equity P/E Fund has established a solid long-term track record. Although it underperformed the benchmark and category average in 2020 and 2021, the fund has made a strong recovery in recent years. Over the last year, Tata Equity P/E Fund outperformed the benchmark Nifty 500 - TRI by an impressive 12 percentage points on a rolling return basis and also outpaced many of its peers. Over the 2-year and 3-year periods too, it beat the benchmark by around 5.5-8.5 percentage points and outpaced the category average by about a percentage point. Over longer periods of 5 and 7 years too, the fund has outpaced the benchmark and performed nearly in line with the category average.

In terms of volatility, Tata Equity P/E Fund has shown levels that are competitive with the benchmark and the category average. Its Sharpe ratio (0.34), which measures risk-adjusted returns, is currently higher than both the benchmark and many of its peers. This highlights the fund's ability to provide investors with steady risk-adjusted returns over the long term.

What is the investment strategy of Tata Equity P/E Fund?

Tata Equity P/E Fund adopts a portfolio management strategy centred around value investing. The fund seeks to identify undervalued companies which are poised for a sharp turnaround or a substantial improvement in profitability. It invests at least 70% of its assets in shares that are trading at a P/E which is lower than the 12-month trailing P/E of the BSE Sensex on a rolling basis. These stocks may or may not be a part of the BSE Sensex. While selecting stocks, Tata Equity P/E Fund also considers other parameters such as management competitiveness, business competitiveness, growth prospects, etc. It seeks growth within stocks identified as value by utilising the following factors:

1. Sectors expected to grow over the next 1 to 1.5 years;

2. Companies which are market leaders and may outperform the respective sectors;

3. Consistent RoE, RoC, and other return ratios over the last 5-10 years; and

4. Liquidity of the stock.

Tata Equity P/E Fund is market cap and benchmark agnostic and its sector overweight/underweight positions are solely determined by the conviction of the fund managers.

Tata Equity P/E Fund usually holds a compact portfolio of around 35 to 45 stocks, investing predominantly in the large-cap segment. As of September 30, 2024, the fund held 43 stocks in its portfolio diversified across sectors. Among its top holdings, it held exposure to market leaders such as HDFC Bank, Bharat Petroleum, Kotak Mahindra Bank, Coal India, and NTPC. The top 10 holdings in the fund's portfolio collectively account for about 40.8% of the total assets. With an emphasis on a disciplined investment strategy, Tata Equity P/E Fund typically maintains stocks in its portfolio with a long-term view. However, it occasionally churns a portion of its portfolio and has recorded a moderately high turnover of 50-85% in the last one year.

Over the last two years, Tata Equity P/E Fund has benefitted the most from its exposure to Hindustan Aeronautics, Bajaj Auto, NTPC, Power Grid Corporation, and Oracle Financial Services that turned out to be multi-baggers and helped it generate significant gains for investors. It also benefitted from its holdings in ICICI Bank, Coal India, Hero MotoCorp, ITC, Radico Khaitan, and PNB Housing Finance, which were among the other top contributors to its gains.

Tata Equity P/E Fund's portfolio is skewed towards Financials which form nearly one-third of the fund's portfolio. Consumption, Power, Pharma, Petroleum, and Mining are the other prominent sectors in the fund's portfolio collectively forming another one-third of its assets. It also held significant exposure to Auto & Ancillaries, Infotech, Retail, and Telecom sectors. The fund's portfolio has a well-balanced allocation towards cyclical and defensive sectors.

Is Tata Equity P/E Fund suitable for my investment goals and risk tolerance?

Tata Equity P/E Fund has delivered strong performance across various market phases and has emerged as a solid contender in the Value Fund category. While its performance has been reasonable compared to the benchmark, it may occasionally underperform in the short to medium term due to its value-focused strategy, which often takes time to show results. However, over the long term, it has the potential to substantially outperform the benchmark and many of its peers as the underlying stocks achieve higher earnings growth.

Tata Equity P/E Fund has outperformed the benchmark and many of its peers by a significant margin during both bull and bear markets in the past, resulting in strong returns for its investors. It has managed this without taking on excessive risk. The fund has shown reasonable volatility within its category, and its risk-adjusted returns are better than the benchmark and several of its peers.

Tata Equity P/E Fund is suitable for long-term investors looking for a reliable performer in the value investment segment with an investment horizon of at least 5-7 years.

Watch this video to find out the best Value Funds for 2024:

Note:  This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Registration granted by SEBI, Membership of BASL and certification from NISM no way guarantee performance of the intermediary or provide any assurance of returns to investors.

The securities quoted are for illustration only and are not recommendatory.

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DIVYA GROVER is the co-editor for FundSelect, the flagship research service of PersonalFN. She is also the co-editor of DebtSelect. Divya is an avid reader which helps her in analysing industry trends and producing insightful articles for PersonalFN’s popular newsletter – Daily Wealth letter, read by over 1.5 lakh subscribers.
Divya joined PersonalFN in 2019 and has since then used stringent quantitative and qualitative parameters to analyse funds to provide honest and unbiased research to investors. She endeavours to enable investors to make an informed investment decision and thereby safeguard their wealth.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.

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