the Tata Equity P/E und to succeed, the fund
manager needs to consider not only the low P/E
ratios, but also bank on intense research and
sound risk management techniques to help identifysuitable
May 17, 2004 will go down in history as the worst
suffered by the equity markets. Markets declined
by as much as 800 points in a matter of points
to only retreat marginally. Even though the decline
in the indices was steep and unjustified, it was
also an aberration as markets have been choppy
for sometime now.
With investors already confused about where to
put their money, in a volatile market, the decision
becomes even tougher. To take advantage of the
current scenario, Tata Mutual Fund is launching
the Tata Equity P/E fund as it feels that markets
have come down considerably and a lot of stocks
are available at very good bargains.
Tata Equity P/E fund (TEPEF) is an open-ended
equity fund, which will aim to identify undervalued
shares with respect to the BSE Sensex and invest
a bulk of its portfolio in those shares. The investment
philosophy of this fund will be to invest in stocks
that have a P/E ratio lesser than the BSE Sensex.
Such stocks will form at least 70% of the portfolio
and the rest 30% of net assets can either be fully
invested in stocks that do or do not satisfy the
P/E criterion or of the 30%, up to 20% can be
invested in debt and money market instruments.
The fund will use a trailing P/E ratio and not
the forward P/E ratio to identify stocks that
are undervalued. P/E ratio is calculated by dividing
the market price of a share by the earnings per
share (EPS) and indicates how much an investor
is willing to pay for a share for every rupee
of its earnings.
The P/E ratio is calculated in two ways: forward
P/E is calculated by dividing the last traded
market price of the stock by the projected EPS
for the current or future financial year and the
trailing P/E is calculated using the actual reported
EPS for the immediately previous completed financial
year. The fund will use the trailing P/E and not
the forward P/E as forward P/E is based on estimates
and therefore uncertain.
Investing just on the basis of P/E ratio may not
be the best investment practice. For this reason,
after a list of stocks is identified, various
other factors will be considered before taking
a decision. These factors will be management competitiveness,
business competitiveness, growth prospects and
other fundamental parameters. Only after a careful
evaluation of all factors will an investment decision
be taken. This means that the P/E ratio will become
the elimination factor and also force the fund
manager to exit after the stock has risen considerably
when it starts trading at P/E levels greater than
the BSE Sensex.
There is another P/E ratio fund in the market
by Franklin Templeton. The fund is called FT India
PE Ratio fund. This fund is different from TEPEF
in a lot of ways. FT India PE Ratio fund is an
open-ended strategic asset allocation fund and
the P/E ratios of NSE Nifty are used unlike the
BSE Sensex P/E ratios used by TEPEF.
FT India PE Ratio fund uses the Nifty P/E to find
out how overvalued or undervalued the equity market
is and accordingly rebalance the asset mix in
equity, debt and money market instruments. The
equity component of this scheme replicates the
Nifty and the fund can only invest in stocks that
make up the NSE Nifty index. The allocation to
equities or debt is based on P/E ratio of Nifty.
Lower the Nifty P/E, more the allocation to equities
and vice versa.
The Tata Equity P/E fund is based on a different
investment style than the already existing P/E
fund in the market. This fund will be most appropriate
at times when the markets turn extremely volatile.
When there is uncertainty in the markets, not
only is the investor apprehensive of taking
a decision, so are the fund managers. At these
times, if high quality, well-managed, globally
competitive companies are bought at appropriate
valuations, they can outperform the market.
The challenge before the fund manager is intense
research and sound risk management techniques
to help identify suitable stocks.
While the P/E ratio may be one of those many factors
in taking a decision but it is an important decisive
factor. We only hope that the fund manager is
not influenced by the low P/E ratios but also
looks into all other factors, as promised. This
will help the fund identify value stocks both
in a bull as well as a bear market.
The IPO of the fund opened on May 17, 2004 and
will close on June 15, 2004.