Birla Sun Life Frontline Equity
- Analyst Rating: Silver
- Date of Analysis: December 2016
- Fund Manager: Mahesh Patil
- Process: Plying a benchmark-aligned process, the manager scouts for companies with good growth prospects.
- Performance: The fund has delivered a solid showing on the risk/return front over the long haul.
- Expense Ratio: 2.27%
- Minimum Investment: Rs 1,000
A skilled manager and his well-executed investment approach make this fund a compelling choice for investors.
Manager Mahesh Patil is evidently mindful of the benchmark S&P BSE 200 Index while investing. For instance, he invests largely in stocks chosen from the index. Also, he loosely aligns the portfolio’s sector weightings with those of the index. But that has not resulted in a benchmarklike showing. Under his watch (November 2005-November 2016), the fund (17.22% annualised) has bested 96% of its peers. Year on year, too, Patil has ensured that the fund has delivered consistent returns.
Its success can be attributed in no small measure to Patil’s deftly implemented investment approach. His stock-picking has been impressive. A growth bias is apparent as Patil focuses on factors such as ROCE, ROE, and earnings growth potential. Despite the benchmark-awareness, Patil is no closet indexer, as he is willing to deviate substantially from index weightings in individual holdings.
Patil has also used his understanding of market movements and stock price points skilfully. Tactical plays and a buy/sell pattern within long-held holdings are integral to the approach. But some caveats are in order. In an upturn that is not broad-based--in other words, when some sectors gain significantly more than others--the benchmark-consciousness may cause the fund to underperform peers that invest in an unconstrained manner. Also, tactical plays add an element of timing risk.
Then again, evidently Patil is at ease with the investment approach. He has plied it with skill across market conditions, and we draw extra comfort from his stock-picking prowess. Our confidence in the fund’s ability to deliver pleasing results over a market cycle has grown.
Franklin India Bluechip
- Analyst Rating: Gold
- Date of Analysis: December 2016
- Fund Manager: Anand Radhakrishnan
- Process: A research-driven investment approach with a focus on reasonably valued quality stocks.
- Performance: The fund has delivered a strong performance on the risk-adjusted-return front.
- Expense Ratio: 2.22%
- Minimum Investment: Rs 5,000
A seasoned fund manager combined with a solid investment process from one of the best asset managers warrants a Gold rating.
The most appealing aspects of Franklin India Bluechip are its management team and the investment style it uses. The management team is headed by Anand Radhakrishnan, who is a skilled manager and a proficient stock-picker. He has built an impressive track record over the years across a number of funds he runs for the fund house. He has been managing this fund since April 2007 and is supported by a strong and stable investment team that ranks among the best in the industry.
Focused on growth and quality companies, the fund embodies Franklin Templeton’s brand of management. The investment approach is team-driven, where the focus is on identifying businesses with clean balance sheets, strong business models, sustainable competitive strengths, and high corporate governance standards. Although Radhakrishnan looks for companies with sustainable growth prospects, he is fairly valuation-conscious and is willing to stay away from issues he believes are overvalued. Clearly he is unlikely to be at his best in sharply rising or momentum-driven markets, but he has proved himself as a smart stock-picker. He frequently invests in beaten-down stocks or out-of-favour growth companies, especially because of external factors rather than deteriorating fundamentals. This aspect of the strategy has served the fund well.
Investors must bear in mind that Radhakrishnan’s investment approach can result in significant deviations in the fund’s performance from that of the benchmark index and category peers. That said, the large-cap, quality-driven strategy provides resilience in downturns (for instance in 2008 and 2011). It is also noteworthy that Radhakrishnan has chosen to stand by his investment style even when it is out of favour, suggesting a disciplined approach. We believe that his investment style will hold the fund in good stead over a market cycle.
HDFC Equity
- Analyst Rating: Gold
- Date of Analysis: January 2017
- Fund Manager: Prashant Jain
- Process: A research-driven process that focuses on quality growth stocks.
- Performance: Over the long haul, the fund boasts a stellar track record across the risk and return parameters.
- Expense Ratio: 2.20%
- Minimum Investment: Rs 5,000
An unwavering focus on the long-term and willingness to back conviction bets are integral to manager Prashant Jain’s investment approach. Hence he doesn’t shy away from trading near-term pain for long-term gains. This approach was on display not so long ago (in 2015) when Jain held on to his investments in public-sector banks (particularly SBI) despite it running into rough weather, and the fund languishing in the bottom performance quartile. This was not surprising as the manager has long favoured public-sector banks in his portfolios as he believes that they will be major beneficiaries of India’s long-term structural growth.
Notwithstanding short-term blips, Jain has demonstrated considerable skill in navigating the fund through varying market conditions over the years. Expectedly, he made a promising comeback this time around as well with his conviction in public-sector banks paying off well, helping it to record top-quartile performance in 2016.
Research is central to the investment style, with Jain effortlessly combining top-down and bottom-up analysis (with more emphasis on the latter) to identify companies with robust business models, strong balance sheets, and competitive advantages. He pays heed to valuations while picking stocks, freely combining relative and absolute valuation methods. While constructing the portfolio, Jain is mindful of the benchmark index weights, but is not benchmark-aligned. His willingness to be disciplined and adhere to his investment style even when it is out of favour is noteworthy.
Admittedly, the process has its biases. The valuation consciousness coupled with aversion to speculative fare may cause the fund to lag peers in momentum-driven markets. Further, in a downturn, Jain’s policy of staying fully invested could lead to underperformance versus peers that get their cash calls right. Yet, we believe the process will hold long-term investors in good stead.
An exceptional manager backed by a strong team, a robust investment approach, and one of the best asset managers in the industry add up to a best-in-class offering, in our book.
HDFC Growth
- Analyst Rating: Silver
- Date of Analysis: January 2017
- Fund Manager: Srinivas Rao Ravuri
- Process: Ravuri typically looks for growth-oriented quality stocks that are reasonably priced.
- Performance: Under Ravuri, the fund has built a strong track record on the risk/return front.
- Expense Ratio: 2.49%
- Minimum Investment: Rs 5,000
The fund remains a strong choice for investors.
Manager Srinivas Rao Ravuri continues to do what we have come to expect of him--look for quality names with sustainable advantages using a research-intensive approach, which comes naturally to him as a result of solid experience as a research analyst spanning more than 11 years before taking charge of this fund in April 2006.
Ravuri combines top-down and bottom-up approaches, with the latter being significantly more important. He looks for companies with strong business models and sustainable advantages. A long-held investment in Solar Industries typifies the approach. Ravuri bet on the explosive manufacturer’s technological and sales prowess coupled with the high barriers to entry into the business and has been rewarded over the long haul.
The process has its caveats, though. Ravuri is valuation-conscious, which with an inherent long-term orientation means he will take short-term pain for long-term gain. For instance, he kept his faith in State Bank of India in 2013 even though its fluctuating fortunes (following a rise in nonperforming assets and poor results) hurt the fund’s performance. Further, in a downturn, his policy of staying fully invested may lead to underperformance versus peers that get their cash calls right.
Apart from avoiding areas of the market he considers expensive, the manager will also back his best ideas with conviction. The strategy can result in investments that go against the norm over shorter periods. For instance, investing in certain out-of-favour public sector names, while steering clear of select technology and healthcare companies that Ravuri deemed expensive, contributed to the fund’s poor showing in 2013.
However, we believe the approach can hold the fund in good stead over the long haul. Indeed, on the manager’s watch (April 2006 to December 2016), the fund has delivered a strong showing, besting both the S&P BSE Sensex Index and the category average. Our conviction in the fund’s long-term potential remains unchanged.
HDFC Top 200
- Analyst Rating: Gold
- Date of Analysis: January 2017
- Fund Manager: Prashant Jain
- Process: A research-driven process that focuses on quality growth stocks.
- Performance: Over the long haul, the fund boasts a stellar track record across the risk and return parameters.
- Expense Ratio: 2.25%
- Minimum Investment: Rs 5,000
Manager Prashant Jain is sticking to his guns. He continues to have faith in the financial services sector, particularly in State Bank of India. In 2015, the public sector bank’s fluctuating fortunes (following a rise in nonperforming assets and poor results) had an impact on the fund’s showing. However, it performed well in 2016 and the fund made a promising comeback.
The bank continues to feature as Jain's top pick and we aren’t surprised. He has long favoured public-sector banks in his portfolios, believing that they will be major beneficiaries of India’s long-term structural growth. His conviction in SBI stems from confidence in its core operations, ability to raise inexpensive monies, and attractive valuations. Indeed, given his investment style, this is how we expect him to act.
Research is central to the investment style, with Jain effortlessly combining top-down and bottom-up analysis (with more emphasis on the latter) to identify companies with strong balance sheets and business models. He pays heed to valuations while picking stocks, freely combining relative and absolute valuation methods. Despite largely investing in S&P BSE 200 stocks, he has shown immense flair with portfolio positioning. His in-depth research has given him the confidence to take meaningful variances from index weights at both stock and sector levels. It is noteworthy that over the years, Jain has demonstrated considerable skill in navigating the fund across market conditions and delivered pleasing long-term results.
Admittedly, the process has its biases. The valuation consciousness coupled with aversion to speculative fare may cause the fund to lag peers in momentum-driven markets. Further, in a downturn, Jain’s policy of staying fully invested could lead to underperformance versus peers that get their cash calls right. Yet, we believe the process will hold long-term investors in good stead.
Our reasons for liking the fund--a supremely skilled manager, a robust process, and one of the best asset managers--remain intact.
ICICI Prudential Top 100
- Analyst Rating: Silver
- Date of Analysis: December 2016
- Fund Manager: Sankaran Naren
- Process: A disciplined investment process following a top-down approach to evaluate stocks.
- Performance: Excellent track record across the risk and return parameters.
- Expense Ratio: 2.43%
- Minimum Investment: Rs 5,000
Our confidence in the fund’s prospects remains strong.
This is manager Sankaran Naren’s second stint on the fund after running it from September 2006 to February 2011. He relinquished fund management duties for about a year and returned to the helm in February 2012. We think highly of Naren’s investment skills, and it helps that he plies an investment strategy he has made his own through the years.
An interesting facet of Naren’s investing style is he will stick to his convictions even if the situation is contrary to his investment decision. The strategy is centred on a top-down approach and sector bets. The portfolio has a large-cap bias with a value orientation and focuses on stocks that have significant long-term growth potential. The approach of regular profit booking and rebalancing of the portfolio has helped the fund to buy equities at low valuations and sell at high valuations. We believe in Naren’s ability in reading the macroeconomic environment. He studies factors such as fiscal policy, current account deficits, inflation, economic growth rate, and government policies to form his top-down views. His philosophy is to ensure the fund performs better than peers when markets fall, even if the strategy hurts performance in rising markets, thereby ensuring robust performance over a market cycle. We believe such funds usually tend to do well across market cycles when one holds for the long term.
Naren makes use of relative valuation parameters to invest in large-cap stocks he believes are attractively priced relative to their growth prospects. It isn’t uncommon for him to trade aggressively. While Naren runs a pure-play large-cap strategy, the typical peer can invest roughly up to 30% in small/mid-caps. As a result, the fund runs the risk of losing out on the impetus smaller-cap stocks can provide. Naren's tactics are not without risk, but we believe the fund can hold investors in good stead over a market cycle.
Reliance Top 200
- Analyst Rating: Silver
- Date of Analysis: June 2016
- Fund Manager: Sailesh Raj Bhan
- Process: Investing in companies that have high/rising ROEs and scalable business models.
- Performance: The fund has delivered impressive performance on the risk/return front.
- Expense Ratio: 2.49%
- Minimum Investment: Rs 5,000
The fund’s investment approach underwent a change in August 2011 to allow manager Sailesh Raj Bhan more freedom. Previously it was a pure-play large-cap strategy known as Reliance Equity Advantage, with the portfolio’s sector weightings firmly aligned with those of the index. Clearly, executing such a strategy constrained the manager.
The approach was modified to give Bhan more leeway, with the investment universe expanded to the top 200 companies by market cap, allowing investments in small/mid-caps. Unsurprisingly, the same has worked well for the fund. Though the weightings of a few sectors may still somewhat align with those of the BSE 200 Index based on Bhan’s view on those sectors, he is now willing to make bigger sector deviations. In our opinion, the changes are a step in the right direction. First, Bhan is a proficient stock-picker in the small/mid-cap segment. Also, his track record on other funds suggests he is at his best using an unconstrained approach. In effect, the current approach helps Bhan play to his strengths.
The fund also benefits from Bhan’s ability to pick fundamentally sound stocks and understand long-term trends. He emphasises fundamental research when choosing stocks, seeking out issues that have good growth prospects and healthy or rising ROEs. The top-down approach is considered, too. Bhan’s willingness to take larger exposure to small/mid-caps if the opportunity arises and be more liberal with sector bets may result in the fund’s performance diverging from a typical peer's over the short term. For instance, in the upturn of 2012, the larger small/mid-cap exposure helped it feature in the best performers in the India large-cap Morningstar Category. Conversely, in 2013 the fund underperformed 66% of its category peers.
But we draw confidence from the presence of a skilled manager supported by an experienced team and a research-intensive approach, which we believe can hold the fund in good stead over the long haul.
