Fund Focus: Tata Balanced Fund

High P/E stocks will no longer lead the market

Pradeep Gokhale, Senior Fund Manager, Tata MF

6th February 2017

In a nutshell

1. After 7 strong years of alpha generation, Tata Balanced Fund had a muted CY16, as it sought to reposition its portfolio in light of a change in market leadership

2. Pradeep believes market leadership has changed from high P/E stocks to GARP - growth at a reasonable price

3. High end consumer discretionary stocks are in his avoid list and infra and rural themes are in his buy list, as he actively repositions his portfolio to regain its winning ways.

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: After 7 consecutive years of alpha generation and Q1/Q2 performance, CY16 was a disappointment in terms of fund performance. What were some of the issues that hampered performance and what steps have you taken to bounce back to the robust performance your fund is known for?

Pradeep: The fund has predominantly followed a Growth oriented investment approach, with stocks with good growth, compounding characteristics, strong balance sheet with low debt forming a large part of the portfolio. This approach has benefitted the fund over its long history. However, during CY16, 'value' stocks outperformed 'growth' stocks substantially. Stocks from sectors such as metals, oil and gas and corporate oriented banks were the main leaders in the rally, where our fund had lower exposure relative to competition.

WF: What does attribution analysis of CY16 performance point out as key contributors and detractors from performance?

Pradeep: The equity portfolio of Balanced Fund outperformed the Nifty. Our overweight in Cement did well for us Our calls in the consumer discretionary sectors performed well for most part of the year but were beaten down post demonetisation. However, our overweight stance in pharma, construction and industrial sectors did not perform as expected. Also our underweights in metals, oil and gas and corporate banks hurt our performance, particularly more so relative to competition.

WF: Is the debt-equity allocation dynamic or static in this fund? Have there been occasions in the last couple of years where you calibrated the asset allocation in response to market valuations?

Pradeep: We typically keep equity: debt allocation static @75:25 ratio. In the equity portion we do not take large cash calls and our equity allocation would not fall below 70% except in extreme circumstances. The undeployed cash of the equity portion (ranging between 1-5%) is invested in short term money market instruments. We have not deviated from this.

WF: What are the key themes post demonetization and post Budget that you believe will drive equity and debt markets over the next 12-18 months? What are some of the recent changes you have made in your sector allocations on the basis of your market views?

Pradeep: In CY16, the value theme worked, particularly mean reversion of low Price/Book ratios, worked very well. Also, post the rise in global bond yields, stocks with high P/E ratios, which have done well in the past five years, would not lead the markets. We feel, going forward, stocks with earnings growth and reasonable valuations would do quite well. The Budget has focussed on rural and infrastructure sectors. Also post demonetisation we feel high end discretionary consumption would not do as well.

In view of the above, we continue to be overweight on construction, industrials and cement as these will benefit from Government focus on infrastructure. We have added to our holding in energy sector, particularly power utilities and gas sector stocks. In banking we have added weights to corporate banks where earnings growth would be better in next two years and reduced our exposure to NBFCs. In consumer sector our holdings are stocks focussed on lower end consumption.

WF: Many advisors believe that risks in balanced funds are underappreciated especially by new investors, who are taken in more by the category name than the asset allocation that tends to be 70%+ in equity. How should one balance out risks and returns in balanced funds, in this context?

Pradeep: Balanced funds are definitely riskier than income oriented debt funds. However, they have lower risk than equity funds. To maintain a proper risk-return balance, in our fund, we manage the debt portfolio like an income fund with an aim to provide steady returns with low volatility. We do not take large duration calls in the debt portfolio. The equity portfolio is a diversified portfolio with a mix of large and mid-cap stocks.

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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