Tata Balanced Fund: Hold/Risk-averse investors may switch

Recommendation: Hold/Risk-averse investors may switch

Aarati Krishnan

DESPITE a 60-70 per cent allocation to equities, the Tata Balanced Fund suffered sharper swings than the narrow market indices over the past ten months.

Between December 31, 1999 and end-February 2000, the fund's NAV rose 21 per cent, against a 15 per cent gain in the BSE Sensitive Index and the S&P CNX Nifty. But from the peak of end-February 2000, the scheme's NAV suffered an erosion of 41 per cent, while the Sensex and the Nifty lost 35 per cent and 32 per cent respectively. Over this period, the fund has underperformed such funds as the Alliance 95 Fund, K-Balance and Birla Balance.

Suitability: Frequent portfolio churning and a high allocation to technology stocks appear to have contributed to the high volatility. The portfolio strategy suggests that the fund may not be suitable for risk-averse investors. Such investors may use a market uptrend to reallocate their investments between a diversified equity fund and a debt fund.

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Portfolio review: A study of the changes in the fund's portfolio between December 1999 and September 2000 reveals the following features:

The fund has consistently maintained an equity allocation of 60-70 per cent, stepping up investments in equity whenever the proportion declined in line with the broad market. The equity allocation, which hovered at 70 per cent in February 2000, fell to around 60 per cent by end March, but was rose to 70 per cent by May.

Portfolio turnover is quite high, with a large number of stocks entering and exiting the portfolio each quarter. For instance, between November 1999 and March 2000, 23 out of the 41 equity holdings in the portfolio were liquidated; while 19 new equity holdings were added.

The fund appears to show a propensity for momentum-investing, switching investments in line with market preferences. Between December 1999 and March 2000, the fund sold a range of steel, pharma/agrochem stocks and replaced them with infotech/media and entertainment stocks. In the March-June 2000 quarter, the fund sold stocks in auto, cement and packaging and further added to its technology stock holdings.

In June-September 2000, the fund once again stepped up exposures to pharma/agrochem and FMCG stocks.

Technology stocks have consistently accounted for the major portion of equity holdings. Exposure to technology stocks (infotech, media and telecom), which accounted for 31 per cent of the equity portfolio in December, rose to 68 per cent by March 2000. Though the majority of technology stocks lost considerable value between March and May 2000, the weightage of technology stocks in the fund's portfolio has remained more or less unchanged, at 66 per cent by May.

Allocations to non-technology sectors have however, changed substantially from quarter to quarter. Allocation to pharma stocks, which was at 25 per cent in end 1999, fell to less than 3 per cent by June. This has been stepped up to 7.5 per cent in September. Exposure to FMCG stocks, at less than 1 per cent in end 1999, moved up to 11 per cent by June, and further to 15 per cent by September.

There have been quite a few instances where stocks which have exited the portfolio have been re-acquired again. Glaxo and Sun Pharmaceuticals, part of the December 1999 portfolio, exited it in June 2000, but were reinstated by September. Similar is the case with Cadbury India and ITC.

The portfolio has a large number of marginal holdings that could prevent the fund from taking full advantage of the appreciation in its individual holdings.

In the recent times, FMCG and pharma stocks and cyclicals, such as BHEL, have made a reappearance in the portfolio. The success of the portfolio strategy practised by the fund could be attributed to the correct timing of its entry and exit from individual stocks. The fund would, therefore, appear to be unsuitable for conservative investors. The fund has a current NAV of Rs 13.68 per unit on the growth option and charges no entry load. It charges an exit load of 1 per cent for redemption of units within three months of investment.