Just as we experience seasonal cycles, the economy goes through different phases as it expands and contracts, characterized by downward or upward fluctuations of the gross domestic product (GDP).
Currently the Indian economy is grappling with uncertainty due to the COVID-19 pandemic. The prolonged second wave has delayed the nation’s economic recovery. However, the government’s measures to strengthen the economy, large-scale vaccination programme, and infusion of liquidity into the market are likely to accelerate the economic revival.
Business cycles are fluctuations in the economic activities measured by GDP growth and macroeconomic variables. Each business cycle consists of four phases: Recession, Recovery, Expansion, and Slowdown.
In the past few years, multiple global and domestic events have changed the business cycles from a slowdown to a recession to a recovery. Notably, the business cycles theme is combined with opportunities. A macro approach helps identify industries/sectors that are going through internal cycles and emerging stronger. The business cycle theme may allow for a more aggressive stance in terms of sector over/underweight compared to other diversified funds.
Business cycles are becoming shorter and harder to predict due to increasingly dynamic and responsive monetary policy, impact of global and domestic macro variables, i.e. global crisis, foreign interest rates, policy changes, industry crisis, etc. Thus, the need for a fund that adapts to a change in business cycle has risen.
Tata Mutual Fund has launched their new scheme – Tata Business Cycle Fund. It is an open-ended equity scheme following business cycles based investing theme.
On the launch of this fund, Mr Rahul Singh, CIO – Equities at Tata Asset Management Ltd. said, “The focus has shifted to Business cycles investing because of 2 reasons”;
- The business cycles have become shorter. Cycles, which earlier lasted 4-5 years, have now shortened to 1-2 years.
- Over the last few years, the impact of top-down sector allocations has been on alpha generation, which has been very high.
This fund would invest in businesses on a macro basis, with at least 80% of the portfolio invested as per business cycles theme. We believe cycles have become shorter and a portfolio needs to adapt quickly to the changing environment. Hence, the need to have “Tata Business Cycle Fund” in your portfolio.”
Table 1: Details of Tata Business Cycle Fund
|Type||An open-ended equity scheme following business cycles based investing theme.||Category||Thematic Fund|
|Investment Objective||To generate long-term capital appreciation by investing with focus on riding business cycles through allocation between sectors and stocks at different stages of business cycles. However, there is no assurance or guarantee that the investment objective of the Scheme will be achieved. The scheme does not assure or guarantee any returns.|
|Min. Investment||Rs 5,000 and in multiples of Re 1 thereafter. Additional purchase Rs 1,000 and in multiples of Re 1 thereafter.||Face Value||Rs 10/- per unit|
|Entry Load||Not Applicable||Exit Load||
||Benchmark Index||Nifty 500 – TRI (Total Returns Index)|
|Issue Opens||July 16, 2021||Issue Closes||July 30, 2021|
(Source: Scheme Information Document)
What will the investment strategy for Tata Business Cycle Fund be?
Tata Business Cycle Fund aims to be a diversified equity fund that will predominantly invest in equity and equity related securities with a focus on riding business cycles. The scheme will dynamically allocate between various sectors and stocks at different stages of business cycles in the economy.
This scheme would aim to deploy the business-cyclical approach to investing by identifying such economic trends and investing in the sectors and stocks that are likely to outperform at any given stage of business cycle in the economy. It will focus on the top-down approach while identifying sectors based on business cycles.
The fund manager will consider economic parameters, investment indicators, as well as business and consumer sentiments to decide on the expansion or contraction phase of the economy. For example, during period of expansion, the scheme would aim to invest in stocks of companies in the cyclical sectors, as they tend to outperform the broader market during expansionary phase. Similarly, during period of contraction, the scheme would look to invest in defensive sectors stocks or sectors that are less sensitive to changes in overall economic activity.
The endeavour would be to combine a clear macro view with the bottom-up stock selection approach to effectively manage this scheme. The fund manager will favour companies that offer the best value relative to their respective long-term growth prospects, returns on capital, and management quality.
About business cycles
Business cycles in an economy are typically characterized by the fluctuations in economic activity measured by real GDP growth and other macroeconomic variables. A business cycle is basically defined in terms of periods of expansion and contraction. During expansion, an economy experiences an increase in economic activity as evidenced by real GDP growth, industrial production, etc.; whereas during contraction, the pace of economic activity slows down.
The business cycle is a critical determinant of equity sector performance over the intermediate term. The relative performance of equity market sectors typically tends to rotate as the overall economy shifts from one stage of the business cycle to the next, with different sectors assuming performance leadership in different economic phases.
Apart from investing 80% of its assets in equity and equity related instruments selected on the basis of business cycle, Tata Business Cycle Fund may invest up to 20% in other equity instruments. It may also invest up to 20% in debt and money market instruments & gold ETF and up to 10% in units issued by REITs & InvITs.
Under normal circumstances, the asset allocation will be as under:
Table 2: Asset Allocation of Tata Business Cycle Fund
|Instruments||Indicative Allocation (% of assets)||Risk Profile|
|Equity and equity related instruments selected on the basis of business cycle||80||100||High|
|Other Equity & Equity related instruments||0||20||Medium to High|
|Debt and Money market instruments & Gold ETF||0||20||Low to Medium|
|Units issued by REITs & InvITs||0||10||Medium to High|
(Source: Scheme Information Document)
Who will manage Tata Business Cycle Fund?
Mr Rahul Singh, Mr Venkat Samala for overseas investments, and Mr Murthy Nagaranjan for debt portfolio will be the dedicated fund managers for this scheme.
Mr Rahul Singh is Chief Investment Officer – Equities at Tata Asset Management Ltd. He has over 25 years of experience in financial services industry and his qualification includes B.tech and PGDBM. Prior to Tata AMC, he was associated with Ampersand Capital Investment Advisors LLP as Managing Partner, Standard Chartered Securities Ltd. as Managing Director reporting to CEO, and Citigroup Global Markets as Senior Research Analyst Reporting to Head of Research.
Mr Venkat Samala is Research Analyst at Tata Asset Management Ltd. He has an MBA and over 6 years of experience in financial services. Prior to this, he has worked with Quality Engineering & Software Technologies Pvt. Ltd (an aerospace services firm) as a senior design engineer.
Mr Murthy Nagarajan is Head – Fixed Income at Tata Asset Management Ltd. He has over 25 years of experience and his qualification includes B. Com, M. Com, PGPMS, ICWA (Inter). Prior to joining Tata AMC he was associated with Quantum Asset Management Co. Pvt. Ltd. as Head – Fixed Income, Tata Asset Management Ltd. as Head -Fixed Income, Mirae Asset Global Investment India Pvt. Ltd. as Head – Fixed Income.
The other scheme he manages are Tata Gilt Securitites Fund, Tata Short Term Bond Fund, Tata Medium Term Fund (co-fund manager),Tata Hybrid Equity Fund (Debt Portfolio),Tata Equity Savings Fund (Debt Portfolio),Tata Retirement Savings Fund (Debt Portfolio)-Progressive, Moderate & Conservative Plan, Debt Portfolio of Tata Multi Asset Opportunities Fund & Tata Dividend Yield Fund (Debt Portfolio).
Fund Outlook – Tata Business Cycle Fund
Tata Business Cycle Fund will predominantly invest in securities selected on the basis of business cycles. Each phase of business cycle provides investors with unique investment opportunities. It will have exposure to a set of sectors and stocks that are expected to do well based on the phase of the economy.
This scheme adapts to changes as markets are at fair valuations, macro challenges posed by inflation and bond yields going up. It has no constraint on market cap allocation, which makes the allocation purely based on business cycle phase, with a focus on segments most likely to perform well.
However, this scheme will invest based on business cycles in selective sectors and the portfolio will consist of concentrated exposure towards few sectors, thus making it a risky proposition. Moreover, the performance of this scheme will be linked to the fund manager’s ability to identify the shifts in business cycles and swiftly capture opportunities across sectors and stocks at the right time.
Tata Business Cycle Fund is suitable only for investors who can survive the market volatility, have a high-risk appetite, long investment horizon of at least 5-7 years, and an investment objective that aligns with the fund.
This article first appeared on PersonalFN here