Tata Focused Equity Fund's investment philosophy is growth at reasonable price

Tata Mutual Fund, which has Rs 53,635.84 crore worth of assets under its management as on October 31, is launched a focussed equity fund. In an interview to ET’s Anuradha Himatsingka, Tata Mutual Fund senior fund manager Rupesh Patel speaks about the current market and shares the rationale behind launching the new scheme.

With the ongoing concerns around slowdown and Indian macros, what are your views on the equity markets?

India’s GDP growth slowdown has happened in phases, starting with demonetisation, GST, and culminating with the liquidity squeeze due to the NBFC crisis. We believe that risk aversion in the credit market is reducing, given the equity funding support now available to some of the stressed banks and real estate lenders. Also, government’s stated intention to prevent any incident or closures is also a source of comfort. That coupled with the fact that September quarter earnings season was less eventful than the June quarter provides some kind of a base for the market. Economic recovery could be one-to-two quarters away but the valuation range is more palatable now after the corporate tax cut vs. long term averages.

We expect core earnings growth of 10-12% over the next two-three years higher than the normalised nominal GDP growth of 9-10%. The returns should track the earnings growth as the index valuation is already at 10% premium to 10 year historical average. However, the real opportunity can be from broadening of markets (mid-cap valuation at a discount) and change in leadership within the large cap. It already happened in 2019 vs. an extremely narrow market in 2018. That trend could continue in 2020-21, thus, providing an opportunity for a 'focused equity fund' to outperform.

What are the risks you see currently in equity markets?

Apart from the domestic slowdown, the reasons for which are well documented, the key risks are from the geopolitical situation and if that results in higher crude prices. In addition, the risk of global recession arising out of global trend of protectionism can create a global risk-off scenario for equities although the likelihood is low till the US elections in late 2020.

What do you see leading the recovery – consumption or private capex or mere ease of credit availability to NBFCs?

Consumption slowdown is also linked to the slowdown in investments – both in real estate (due to the NBFC crisis) and public capex (due to the fiscal constraints). Large part of informal employment is in SMEs, real estate and construction sector which has been impacted by lack of liquidity. So, the recovery in capex and consumption are somewhat interlinked. The government’s efforts have been so far targeted at reviving investments through corporate tax cuts and the dedicated fund for real estate. At some stage, steps to revive consumption (personal tax cut, incentives for home buyers) is also likely although the extent and timing will depend on the fiscal space available to the government.

Q: Are there any value opportunities in current market scenario?

Our investment philosophy is Growth at Reasonable Price (GARP). So, while we target companies with a good runway for growth, we also keep an eye on sectors or companies that are going through an earnings upgrade cycle. Earnings upgrade provide the necessary valuation cushion in the investment framework. Additionally, unlike deep value investing, GARP philosophy focuses on the value segment but only if there are visible catalysts for re-rating over next six-to-twelve months. Some of the stocks in the PSU space can qualify for the latter in our valuation framework.

Can you elaborate on which market conditions would cause you to shift between market caps?

Focused fund is market cap agnostic and hence, the availability of alpha-generation ideas will be the key driver of portfolio construction. There are opportunities available even within large caps today to do that. As an example, for the last five years, the top 10 stocks in Nifty 50 have outperformed the next 40 stocks by a margin of 30-40 % every year. And the list of top 10 performers has been constantly changing every year. Having said that, today the mid/small cap valuations does offer an opportunity to generate returns over next two-three years even though near term performance will be a function of the pace of economic recovery. We will, therefore, have a healthy mix of mid-caps in our portfolio at this point of time.

What is the rationale for launching a 'focused equity fund'?

Our investment style has lower churn than industry average in various categories and we do not believe in holding a long tail of stocks. So, our fund approach is in sync with what is needed for a focused equity fund. Given the benchmark obsession prevalent today, we believe that traditional diversified fund cannot fully leverage the potential change in market trends i.e. broadening of markets and repeating of value segments. Tata Focused Equity Fund will have a benchmark-agnostic and sector-agnostic approach. It intends to work like a pure bottom-up fund. The fund cannot own more than 30 stocks and will have a healthy mix of large cap, mid cap and small cap.