Tata Mutual Fund has launched Tata Business Cycle Fund, an open-ended equity product following a business cycles-based investing theme. The new fund offer (NFO) will close on July 30, 2021. This is the third such thematic product in this space after L&T Business Cycles Fund (launched August 2014) and ICICI Prudential Business Cycle Fund (January 2021).
The classical business cycles are identified as recurrent, alternating phases of expansion and contraction in a large number of economic activities.
By navigating business cycles accurately, an equity fund can become an all-weather investment vehicle.
Tata Business Cycle Fund aims to deploy the business cycle approach to identify economic trends and invest in sectors and stocks that are likely to outperform. Historically, there is some evidence to suggest that the nature of the stocks that do well in one cycle changes in another cycle. In expansion cycle, mid- & small-cap oriented financials, real estate, consumer discretionary, capital goods and industrials outperformed.
During a slowdown, utilities, pharma, FMCG and IT do well. During recession, large-cap oriented utilities, pharma and FMCG outperform. Autos, metals & mining, large financials and IT do well during recovery phase. So, the business cycle theme investing allows a fund to consider aggressive sector over/under weight calls as compared to other diversified funds across different economic phases.
Nuts and bolts
Tata Business Cycle Fund will invest at least 80 per cent of the portfolio as per business cycles theme and the rest in other equities, debt instruments, Gold ETF, REITs and InvITs. The fund has the flexibility to go overseas for investments and this can be handy in a period of domestic recession. It has limited room to take aggressive cash calls. During times of global recession or crisis, the scheme may also look at investing in Gold ETFs as it can provide some insulation against the downside risk in equity portfolio.
The fund seeks to identify business cycles with two frameworks, one is the macroeconomic framework based on the various macroeconomic indicators and sentiment indicators and the second one is identify the sectors, which sometimes may more important than the macroeconomic cycle.
Portfolio parameters such as market cap allocation and number of stocks in portfolio will be based on the stage of business cycle. For instance, in a slowdown period, there will be more large-caps, fewer number of stocks as well as sectors. But when the economy is expanding and growing rapidly, large-cap allocation would automatically be lower and the number of stocks would be higher. Portfolio churn will be a function of the frequency of cycle changes.
Our conversation with Tata MF indicates that the fund will not go down below a certain percentage of large-caps. It will tend to have a flexi-cap kind of allocation. L&T Business Cycles Fund currently has 45 per cent in large-caps while 54 per cent is in mid- and small-caps. ICICI Prudential Business Cycle Fund has 67 per cent in large-caps, and 17 per cent in mid- and small-caps while about 4 per cent is in US stocks.
Investors should note a few things before investing in thematic Funds. First, any thematic fund should be part of your satellite portfolio. Second, the time of entry and exit is important when it comes to sectoral calls. Though business cycle investing is marketed as an all-weather theme, the actual portfolio performance has to be good, no matter how sophisticated a fund’s strategy sounds.
Three, accurate identification of business cycles is a tough task and repeating the same is even tougher. This is where the experience of the fund management team will be tested. For instance, L&T Business Cycle Fund has under-performed its benchmark in both three and five-year periods. Four, since these funds take aggressive sector over/under weight calls, the risk-return ratio is different compared to plain-vanilla equity funds.
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