7 excellent flexi-cap funds

By Morningstar Analysts |  25-04-17 | 
 

Here are the flexi-cap funds that have been assigned a Gold or Silver rating by our fund analysts. The research has been arranged according to the date of analysis.

Templeton India Growth 

  • Last Reviewed: March 2017
  • Star Rating: 3 stars
  • Analyst Rating: Silver
  • Fund Manager: Vikas Chiranewal
  • Investment Style: Large Blend
  • Investment Process: The fund manager maintains concentrated portfolio and goes heavily off-benchmark if the fundamentals remain strong.
  • Performance: The fund had a bad run for 3 years (2013, 2014, 2015) but picked up last year. It’s 15- and 10-year annualized returns are average.

The fund's value-oriented investing strategy leads to an offbeat portfolio, which varies to a large extent to its benchmark--S&P BSE 200 India. Low exposure is maintained in the defensive sector for a long time given the rich valuation of the stocks in this space. In terms of sector allocation, the manager has increased the stake in large software companies as he believes the IT industry is in a globally competent business and not expensive compared with other sectors.

The manager focuses on investment in stocks that pays off in the long term and does not believe in timing the market. For instance: Infosys-- Although the stock has underperformed, the manager is convinced on its long-term growth prospect and continues to hold on to the stock. The low turnover ratio (5%-17%) of the fund clearly bears out the buy-and-hold investment strategy. The fund substantial investments in Tata Chemicals and Bajaj Holdings are a case in point.

Typically, the portfolio is concentrated in fewer stocks, which is evident from its top 10 holdings, which comprises about 70% of its total portfolio versus the category norm of 40%. The manager tries to add diversification by investing in holding companies whose stock price will be influenced by a number of the underlying businesses. Post demonetisation, the auto sector was hit badly with disappointing sales numbers and the manager promptly exited from Maruti Suzuki in the month of December 2016.

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Templeton India Equity Income 

  • Last Reviewed: March 2017
  • Star Rating: 3 stars
  • Analyst Rating: Silver
  • Fund Manager: Vikas Chiranewal
  • Investment Style: Large Blend
  • Investment Process: The fund sports a concentrated portfolio which varies widely to its benchmark. They follow a time-tested investment philosophy with a disciplined and long-term approach to value-oriented investment.
  • Performance: In 2014 and 2015, the fund consecutively underperformed the category average but bounced back last year. It’s 10-year annualized return is average and its 5-year return below average.

The fund’s mandate is to focus on identifying companies with high dividend yields both in India and overseas, but that does not form the crux of the strategy. The investment philosophy is built upon the 3-core principle--value orientation, patient investment outlook, and bottom- up approach. It follows a disciplined, yet flexible, long-term approach to value-oriented investing and looks at stock prices and markets from a five-year horizon. It invests around 35% of the assets in overseas market.

While evaluating these stocks, the team uses the research of the emerging- markets team, which follows a similar approach of picking growth stocks that are trading at significant discounts to their intrinsic values.

It conducts comprehensive fundamental analysis to assess a firm's long-term value with 5-year forecasts based on projected future normalised earnings, cash flow, or asset value potential.

Within the framework, it gives emphasis to qualitative analysis like understanding the business, its management quality, ownership structure, and environmental, social, and governance practices. It covers roughly 200 stocks, of which 120 stocks form the core list, and the emerging-markets teams covers roughly 3,000 stocks.

The buy-and-hold approach complements the investment strategy. The framework, supported by risk-management systems, due diligence procedures, and regular reviews, makes sure the fund remains in line with one's investment objectives.

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ICICI Prudential Dynamic 

  • Last Reviewed: December 2016
  • Star Rating: 3 stars
  • Analyst Rating: Silver
  • Fund Manager: Sankaran Naren
  • Investment Style: Large Blend
  • Investment Process: The fund manager made his mark leveraging his contrarian bets. The ability to think differently is critical in this strategy.
  • Performance: The fund’s performance has been up and down; excellent numbers in 2013 and 2016 but disappointing performances in 2014 and 2015.

The fund has a disciplined investment process and an active portfolio management approach. Naren follows an aggressive contrarian strategy and is willing to buy companies that are in the midst of a short-term crisis or transition but remain fundamentally sound. Though taking cash calls is integral to the strategy, the fund has not taken high cash exposure in the past few years. The manager evaluates sectors from a top-down perspective, favouring those with attractive fundamentals and shifting away from cases in which he thinks valuations are stretched. He studies factors such as fiscal policy, current account deficits, inflation, economic growth rates, and so on, to form his top-down views. While picking stocks, he makes use of relative valuations to invest in large-cap stocks and knocks out stocks with high leverage. The strategy is complex, and the success of the fund depends on skilled execution; we believe Naren can make the process work.

The fund is positioned true to its large-cap orientation by maintaining around 70% of its portfolio. When valuations in the mid-cap space are attractive, the fund manager seeks to increase the fund’s exposure to such stocks while ensuring it does not constitute major part of the portfolio. He aggressively trades large-cap picks based on relative valuations, but with small/midcaps he tends to have a longer investment horizon. The turnover ratio of 124% for the equity component bears out the aggressive trading. The fund’s deeper-value profile and heavy contrarian bets drags the portfolio away from that of both the CNX Nifty Index and its peers. Even though he typically keeps higher cash, the fund has delivered impressive returns during his tenure.

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Franklin India Prima Plus 

  • Last Reviewed: December 2016
  • Star Rating: 4 stars
  • Analyst Rating: Gold
  • Fund Manager: Anand Radhakrishnan
  • Investment Style: Large Growth
  • Investment Process: The portfolios is large-cap focused with a bias for quality growth stocks. The fund manager follows research-driven investment approach with a focus on reasonably valued quality stocks.
  • Performance: After a good run for 3 years, the fund marginally underperformed the category average last year.

Both large and small/mid-cap stocks form part of the portfolio, with 70% allocation to large caps. Anand Radhakrishnan is benchmark-agnostic while constructing the portfolio and selects stocks using a bottom-up approach.

This, coupled with his penchant for contrarian bets, often results in a portfolio that is dissimilar to that of the typical peer. For instance, as of November 2016, he held 18.4% in the consumer cyclical sector versus the category average of 14.4%. Similarly, his investments in cement and metal and mining stocks in 2013 in the midst of an economic downturn bear out his willingness to invest against the grain.

Radhakrishnan prefers private-sector entities over their public-sector counterparts, in line with his belief that the former offer more-robust business models and superior operational efficiencies. For instance, private-sector banks such as HDFC Bank and ICICI typically feature as core holdings. Radhakrishnan trades with roughly 10%-15% of the portfolio. These tend to be established names whose price points he understands well. A long-term orientation is perceptible in the overall portfolio as borne out by the turnover ratio (March 2016: 12.5%, March 2015: 32.4%).

Radhakrishnan backs his convictions by taking concentrated bets at the stock level, but that has not impaired the fund’s risk/reward profile. Taking cash calls is not a part of the strategy.

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ICICI Prudential Value Discovery 

  • Last Reviewed: September 2016
  • Star Rating: 5 stars
  • Analyst Rating: Silver
  • Fund Manager: Mrinal Singh
  • Investment Style: Large Growth
  • Investment Process: The fund manager Singh combines absolute and relative valuation parameters to scout for attractively valued stocks.
  • Performance: After an amazing run for 7 years, the fund faltered last year and even this year is running below the category average. But it’s 5- and 10-year annualized performances are excellent.

Singh’s investment approach entails scouting for stocks he believes are trading at a significant discount to their fair value. He relies on a combination of absolute and relative valuation parameters (such as P/E, price/book value, EV/EBITDA) for picking stocks. Additionally, he looks for differentiating factors (technological prowess, cost advantage) that can give the company a sustainable edge. Until mid-2014, Singh invested predominantly in the small/mid-cap segment. However, stretched valuations in that space and surging assets prompted him to expand his investment universe to accommodate large-cap stocks.

When we last reviewed this fund in June 2015, it was a part of small/mid-cap category. However, in the light of the changes in the fund’s portfolio and its management style, we changed its category to flexicap. Nonetheless, it continues to be an impressive performer. It outperformed the category average for 7 consecutive years. Though it underperformed last year, its 10-year returns put it at top of the chart in its category and it also is impressive in the 5-year return parameter. 

Read the analyst note 

Reliance Equity Opportunities

  • Last Reviewed: June 2016
  • Star Rating: 3 stars
  • Analyst Rating: Silver
  • Fund Manager: Sailesh Raj Bhan
  • Investment Style: Large Growth
  • Investment Process: The fund manager follows his convictions and does not shy away from taking big sector/thematic bets. He plies a free-flowing investment process encompassing multiple aspects while selecting stocks.
  • Performance: Though the fund delivered a below average performance last year, it picked up this year and its 3- and 5-year returns are ahead of the category average.

Bhan’s investment strategy is flexible in nature and encompasses multiple aspects. He plies a growth-at-a-reasonable-price approach to selecting stocks. He is conscious of valuations but does not mind paying more for a company if he believes it has sustainable advantages over its peers and good growth prospects. He prefers companies with healthy or rising ROEs over a 3- to 5-year period.

Bhan also pays heed to qualitative issues when evaluating a company and uses fundamental research to scout for them.

Taking big sector/thematic bets forms an integral part of the investment strategy. Bhan typically uses a macro overlay to choose sectors. Another noteworthy aspect of Bhan’s investment style is his penchant for emerging/niche themes (roughly 20%), which he believes have substantial upside potential over the long term. He invests up to 10% of assets in value stocks to reduce price risk in the portfolio, given its large growth bias. Bhan invests in stocks from across market segments, with 40%-60% of assets in large caps. He is patient with his investments in mid/small-cap stocks, emerging/niche themes, and value picks, given his believe that such companies have long gestation periods and may not bear fruit immediately. On the other hand, large caps are in a position to generate market-linked returns, ensuring stability and adequate liquidity in the portfolio.

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Franklin India High Growth Companies

  • Last Reviewed: June 2016
  • Star Rating: 5 stars
  • Analyst Rating: Silver
  • Fund Manager: Roshi Jain
  • Investment Style: Large Growth
  • Investment Process: A research-driven investment approach with a focus on high growth stocks at reasonable valuation. This fund has a fluid and aggressive investment style at play.
  • Performance: After a very impressive 3 years, 2015 and 2016 were not the best for the fund. The fund has not completed 10 years, but it’s 5-year return is good.

Roshi Jain is flexible in her investment approach while constructing the portfolio and invests in stocks from across market segments (large, mid-, and small caps) without any bias. There is also an inherent aggressive streak in her investment style. She does not shy away from taking significant sector and stock bets.

Stock bets are taken in liquid names so that they can be easily liquidated in the event of an investment call going wrong. She also avoids investing in companies that compromise minority shareholders' interest and have corporate governance issues.

The investment process is research-intensive and relies heavily on a bottomup approach. Jain scouts for sectors and stocks that have structural drivers, offer high growth, and are available at reasonable valuation. She prefers companies that focus on organic growth and have potential to post a strong incremental ROIC over the long term. Jain takes contrarian bets with a long-term horizon if the stock has been affected negatively owing to external factors.

Taking cash calls is not a part of the investment strategy.

The process is sound and workable over the long term and has been executed with skill by the manager so far.

Read the analyst note

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