The Hindu Business Line : Tata Equity P/E Fund: Hold

INVESTORS in Tata Equity P/E Fund can stay with the fund. With the recent rally in stock prices, the scheme has registered significant gains. The scheme has gained about 30 per cent since its launch in June 2004.

The potential of the scheme's investment strategy and the manager's stock selection skills, given the nature of the investment strategy, have still not been tested. Investors can consider enhancing their exposure to the fund after reviewing the scheme's performance a little longer.

Scheme's promise: The scheme's promise is to invest up to 70 per cent of net assets in undervalued stocks. Stocks with a price to earnings ratio less than that of Sensex will be considered undervalued stocks. The premise behind the strategy is that low P/E stocks would generate higher returns over a longer term. The scheme's strategy necessitates higher exposure to mid-cap and small-cap stocks compared to that of an index. The expectation is that its performance would diverge significantly from that of the index and produce excess returns.

The focus is, however, diluted to an extent by the provision to invest up to 30 per cent in stocks with a PE ratio higher than that of Sensex.

If the scheme faithfully maintains 30 per cent in such richly-valued stocks, the divergence from the index will be contained within a range, and the returns would also be suitably lower. This provision is a risk-containment mechanism.

Scheme's portfolio: At the end of November 2004, the scheme had about Rs 110 crore of assets under management. The scheme was not fully invested with about 10 per cent of cash.

In terms of industry exposure, the portfolio is fairly diversified, with none of the industries accounting for more than 10 per cent of net assets.

The scheme has a lower proportion invested in industries such as oil, gas and banking compared to their proportions in the index.

In terms of stocks, the scheme is not as diversified as one would expect a normal value portfolio to be. The top ten stocks in the scheme account for nearly 37 per cent of net assets.

The scheme has jut 18.2 per cent in stocks outside of BSE's `A' group of stocks; an indication of the fund manager's thinking that there is still considerable value left in larger liquid stocks.

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