Management
Portfolio manager, Bhupinder Sethi, has been on this fund through the full market cycle as he is running this fund since February 2006. The manager has been with Tata Asset Management Company for the last 4.5 years and brings overall 15 years of investment management experience. There are 10 common resources, which includes analysts and portfolio managers, which looks after research for all equity funds.
Tata Mutual Fund currently manages 20 equity funds. That’s a large number, given the investment opportunities in the relatively smaller Indian mutual fund industry. The fund house manages INR 20,593 crores in AUM (includes assets under debt funds) through the end of July 2009, partly came from new fund launches.
The fund house’ equity funds have relatively shown good track record and mostly mirror in the first 50th percentile.
Strategy
This fund invests up to 70% of its assets in stocks, which have lower rolling price-earnings multiples, as compared to the BSE Sensex Index at the time of investment. The portfolio manager is cautious of value trap--stocks which look like values based on their price relative to past earnings but the catch is that those earnings are going to shrink rather than rebound.
Therefore, in additions to PE multiples, he considers relative earnings growth, business model, management, opportunities for stocks to get re-rated as additional stock selection criteria.
Clearly, the fund’s portfolio as of July 2009 reflects the fund’s basis investment strategy as 29% of the portfolio had investments in stocks with higher-than Sensex’ rolling PE.
During the sharp market downside in 2008 and till March 2009, the manager stood by his investment strategy and did not resort to cash calls (except for period May 09-August 09) as compared to its peers. Also, the fund benefited from the entire market rally, which started in March this year as the manager did not resort to market timing exercise, as compared to its peers.
We think the market downturns could potentially benefit the fund as there would be enough investment ideas with valuations available at discounts to their intrinsic values. However, once the market reaches its fair value or becomes overly valued, it would be difficult task to find stocks, which could go well with the fund’s investment strategy.
Performance
The fund was launched in June 2004. This fund’s relatively smaller size (INR 151 crores as of July 2009) in addition to favorable stock selection has helped it to beat 96% of its peers. Since inception, the fund has delivered 29% annualized return, as compared to its benchmark, which posted 26% return.
We looked at the fund’s performance relative to its peers as it benchmark (being a large-cap index) would not necessarily be a right benchmark to compare the fund’s performance. This is a mid-cap fund with a value bias and therefore should be ideally benchmarked against a mid-cap index.
The fund performed well against its peers too. During the last five-years period, the fund posted 27% compounded annualized trailing return, compared to its Morningstar Small/Mid category peers, which registered 22% gain.
During the last one-year period, the fund increased exposure to the information technology sector, particularly in the software industry. Within software, the manager favoured Patni Computer Systems in March 2009 (up 300%) and Mphasis in June 2009 (up approx 50%), given their lower valuations and strong earnings growth, which boosted the fund’s overall return.
The manager also increased holdings in gas utilities companies where he bought Gas Authority of India (up 27%) and Gujarat Gas Company (up 43%) in September 2008, which contributed to the fund’s performance.
The fund also increased exposure to the consumer staples sector, where the manager added Hindustan Lever in June 2009. Within this sector, the Fund also had exposure to Tata Tea and Kansai Nerolac Paints during the last one-year period that are to still add alpha to the Fund’s returns.
The manager reduced the fund’s exposure to consumer discretionary sector, primarily to automobile industry where it exited out Maruti Suzuki and Hero Honda. The fund’s performance was negatively impacted as both of these holdings significantly appreciated (over 100%) during the last one-year period.
The fund’s exposure to the materials sector was also significantly reduced, during the period where it exited out of Tata Steel and Sterlite Industries in February 2009, given the tepid global economic growth.
We think the manager missed the metal sector boom that began almost after his exit from these stocks. Both of these holdings are up over 150% since March this year. The manager also moved out of Great Eastern Shipping in January 2009, thereby missing over 70% rally in the stock through the end of July 2009.
The manager also cut exposure to the financials sector where it did profit booking in banking stocks, given the rising interest rates scenario. The fund’s performance benefited from its exposure to SBI and HDFC Bank (up 40%). However, the manager’s exit out of ICICI in December 2008 hampered the Fund’s return. The stock is up 60% then.
We think the manager was not able to successfully tap large rallies in few sectors like automobiles and metals.
Costs
The fund’s expense ratio at 2.50% was higher than its peers’ average of 2.3%. We would like the fund better if its expenses were at least in line with its peers.
Conclusion
Though the fund has delivered superior performance, we are little concerned due to the investment management team missing out on significant rallies in some sectors. We would like to watch this fund’s performance and the manager’s investment calls for some time before recommending the fund for investments.
