Flexi-Cap funds, as the name suggests, have flexibility to shift exposure and invest in stocks of companies across market cap segments (i.e large cap, mid cap and small cap). Due to their flexible investment style these funds stand a better chance of actively benefiting from the opportunities arising under each market cap, and also go either conservative or aggressive depending upon their inclination to a respective cap segment. However in practice, this depends mainly on the fund management’s expertise in identifying opportunities under a respective market segment, and aligning the portfolio as aggressive, moderate or conservative.
Some flexi-cap funds however, tend to be biased towards large caps. Furthermore, they hedge their equity positions using derivative contracts to cut down the risk arising from the fall in stock prices, as hedge being a counterbalancing activity which aims to reduce or totally eliminate the impact of any adverse price movement.
Tata Equity Management (TEMF) is one such open ended fund from the stable of Tata Mutual Fund. TEMF focuses on investment opportunities predominantly in the large cap space. It hedges its portfolio with index derivatives. The proportion of the portfolio that is hedged depends on the Price to Earing ratio of the S&P CNX Nifty. Launched in July 2006, the fund has been in existence for more than 5 years now.
| Type of scheme | Open-ended |
| Category | Diversified |
| Sub-category | Flexi Cap |
| Style | Blend |
| Launch date | 07-Jul-06 |
| Risk-Return proposition | Low Risk- Moderate Return |
Investment Objective and Proposition
The fund’s primary investment objective is to “seek to generate capital appreciation & provide long-term growth opportunities by investing in a portfolio constituted of equity & equity related instruments and the secondary objective is to generate consistent returns by investing in debt and money market securities. The fund will have the flexibility to invest in a wide range of companies with an objective to maximize the returns, at the same time trying to minimize the risk by reasonable diversification and using derivative as a risk management tool.”
Portfolio Characteristics
In the last one year, exposure of TEMF to large caps has ranged between 64.8% - 86.4% of its total assets, while in midcaps it has ranged from 7.4% - 24.8%. The fund has, occasionally taken aggressive cash calls as the debt and cash component, at times, has been above 10. Being a flexi cap growth oriented fund, TEMF has a flexibility invest across market capitalisations. It also uses derivative strategies for the purpose of hedging the equity positions in the portfolio. The maximum proportion that can be hedged using derivatives depends on the Price to Earnings (P/E) ratio of S&P CNX Nifty. The fund is mandated to invest minimum 65% of its assets in equities and related instruments while the exposure to debt and cash can be 35% at the maximum. Such strategies aim at reducing the downside risk of the portfolio.
Equity Portfolio
| Holdings | Jan 2012 | Feb 2012 | Mar 2012 | Apr 2012 | May 2012 |
|---|---|---|---|---|---|
| ICICI Bank Ltd. | 4.7 | 4.6 | 5.0 | 8.0 | 8.8 |
| Hindustan Unilever Ltd. | 3.9 | 3.9 | 3.8 | 9.1 | 8.7 |
| HDFC Ltd. | 2.7 | 3.2 | 5.6 | 6.2 | 6.5 |
| Sun Pharmaceutical Inds. Ltd. | - | - | - | 5.5 | 6.2 |
| HDFC Bank Ltd. | 5.3 | 5.5 | 5.6 | 5.0 | 5.0 |
| Bharat Petroleum Corpn. Ltd. | 3.3 | 3.7 | 4.0 | 4.4 | 4.9 |
| HCL Technologies Ltd. | 2.7 | 3.4 | 3.5 | 5.5 | 4.5 |
| Tata Consultancy Services Ltd. | 3.2 | 3.5 | 3.5 | 3.9 | 4.2 |
| ITC Ltd. | 3.1 | 3.3 | 3.0 | 3.2 | 3.8 |
| 3M India Ltd. | 3.9 | 3.9 | 3.4 | 3.8 | 3.8 |
Top 10 holdings (in %) as on May 31, 2012
(Source: ACE MF,PersonalFN Research)
As disclosed on May 31, 2012, the portfolio is diversified over 30 stocks. Large caps account for 65.4% and mid & small caps constitute 24.8% of the portfolio. The fund holds 9.8% of its portfolio in cash and equivalent assets. Top 10 holdings form 56.4% of its assets while allocation to top 5 sectors is 51.3%, which shows that the fund has diversified well across stocks and sectors. The fund manager has not churned the portfolio aggressively as its portfolio turnover ratio is 1.08 times which is considered moderate.
How TEMF has fared vis-à-vis its peers
| Scheme Name | 6-Mth (%) | 1-Yr (%) | 3-Yr (%) | 5-Yr (%) | Std. Dev. (%) | Sharpe Ratio |
|---|---|---|---|---|---|---|
| AIG India Equity (G) | 3.5 | -6.1 | 9.0 | - | 4.90 | 0.09 |
| JPMorgan India Equity (G) | 6.0 | -7.6 | 8.3 | 4.0 | 5.24 | 0.08 |
| Franklin India Flexi Cap (G) | 4.0 | -11.2 | 7.8 | 5.6 | 5.66 | 0.07 |
| SBI Magnum Multiplier Plus'93 (D) | 9.1 | -6.1 | 7.1 | 5.8 | 5.42 | 0.06 |
| Tata Equity Mgmt (G) | 6.6 | -4.8 | 6.6 | 4.6 | 4.70 | 0.06 |
| Birla SL Equity (G) | 6.5 | -11.0 | 3.9 | 2.5 | 5.84 | 0.02 |
| S&P CNX Nifty | 6.1 | -8.1 | 3.3 | 3.9 | 5.89 | 0.00 |
(NAV data is as on May 28, 2012. Standard Deviation and Sharpe ratio is calculated over a 3-Yr period.
Risk-free rate is assumed to be 6.37%)
(Source: ACE MF,PersonalFN Research)
The table above reveals that the returns generated by TEMF over last 3 years have been satisfactory; but only when compared to the returns generated by its benchmark in isolation. The fund has managed to beat its benchmark S&P CNX Nifty by a margin of 3.0% which has generated 3.3% CAGR returns over last 3 years. With a standard deviation of 4.7%, TEMF is one of the least volatile funds in the category of Multi cap, Flexi cap and opportunities funds. The standard deviation of S&P CNX Nifty has been 5.89% while the category average is 5.44%; higher than that of the TEMF. The fund however has an average Sharpe ratio of 0.06 though beating the category average. Lower volatility and average risk adjusted returns make the Tata Equity Management a low risk-medium return proposition.
| BULL PHASE | BEAR PHASE | BULL PHASE | CORRECTIVE PHASE | |
|---|---|---|---|---|
| 07-July-2006 - 09-Jan-2008 | 09-Jan-2008 - 09-Mar-2009 | 09-Mar-2009 - 05-Nov-2010 | 05-Nov-2010 - 28-May-2012 | |
| Tata Equity Mgmt (G) | 29.3% | -48.6% | 69.4% | -10.8% |
| S&P CNX Nifty | 60.3% | -53.5% | 71.7% | -12.9% |
(Source: ACE MF, PersonalFN Research)
A study of performance across market cycles reveals that the TEMF has outperformed its benchmark during the bear and corrective market cycles but has substantially underperformed in the bull market phases. TEMF has a tendency to fall less during the bearish phases but its sustained under performance in the bull phases takes away the advantage it has over its peers.
Fund Manager Profile
| Name of the Fund Manager | Mr. Atul Bhole |
| Total Work Experience | Over 5 years |
| Managing the fund since | Apr-12 |
| Qualifications | B.com, C.A, MMS(JBIMS) |
In a nutshell...
Tata Equity Management has generated ordinary returns. Although hedging strategies adopted by the fund make it one of the least volatile funds in the category of multi, flexi and opportunities funds, the risk adjusted returns look rather unattractive especially when compared to those clocked by the category toppers.
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