These highly rated equity oriented value-funds continue to flourish in a landscape dominated by growth funds. The funds are rated Silver based on Morningstar’s Analyst Rating: Funds that fall in this category are high-conviction recommendations. They have notable advantages across several, but perhaps not all, of the five pillars namely People, Process, Parent, Performance and Price. With those fundamental strengths, Morningstar Analysts expect these funds to outperform their relevant performance benchmark and/or peer group within the context of the level of risk taken over the long term (defined as a full market cycle or at least five years).
The funds are managed using a team based approach under the guidance of Dr. J Mark Mobius, who is a pioneer in emerging market investing and leads the Templeton Emerging Markets Research Team. The team runs focused portfolios of 30-40 value-styled stocks with reasonably sized stock and sector bets, leading to a high tracking error and higher volatility. That said, although the portfolio appears more concentrated and risky than a typical peer, it is fairly diversified given the presence of many holding companies that have multiple underlying investments and businesses. Moreover, we like that the investment team eats its own cooking; a portion of the variable compensation is invested in the funds the team runs, helping align the team’s incentives with shareholders'.
Templeton India Equity Income
As the name suggests, the fund’s mandate focuses on identifying companies with high dividend-yield, although that doesn’t form the crux of the strategy. Rather, the investment approach involves identifying growth companies trading at a significant discount to their earnings potential with a five-year investment horizon, with some bias for stocks with reasonable dividend yields. The fund is permitted to invest in foreign equities up to 35% of assets, and the team makes full use of this mandate.
Managers Chetan Sehgal and Vikas Chiranewal are involved in the daily management of this fund. They are seasoned investors who are well ingrained in the team’s value investing philosophy. For this fund, the managers draw on the 30 member strong Templeton Emerging Markets Research Team for the recommendation on foreign stocks. Our conviction here stems from the disciplined approach and the solid execution of the strategy so far. From June 2006 to Oct 2012, the fund has delivered an annualised 13.5%, beating its primary benchmark index BSE 200 (up 9.25%) and secondary benchmark index MSCI India Value (up 9.84%), a performance that ranks in the India Large Cap category’s 14th percentile.
Templeton India Growth
Manager Chetan Sehgal has helmed this fund since its Sept 1996 inception. Such longevity is rare in the Indian mutual fund industry. Sehgal is ably supported by a two-member team. The investment process draws from Dr. Mark Mobius’s investment philosophy of investing in growth stocks that are trading at a significant discount to their earnings potential. In-depth research is central to the process. Manager and analysts scout for stocks that are cheaper than their peers, the broader market, and historical valuations, assuming improving prospects, with a qualitative overlay. Low turnover ratios (Mar 2011: 6%; Mar 2012: 17%) bear out the manager’s willingness to be patient with investments.
Our conviction here stems from the fact that manager has shown resilience by adhering to the process even in periods when it was out of favour. Such discipline and adherence to the strategy is seldom witnessed in India. Expectedly, the investment strategy has held the fund in good stead over longer time frames, typically spanning a market cycle: Over a five-year period ended Oct 2012, which covers both up and down markets, the fund (up 4% annualised) has beaten the BSE Sensex (by 5 percentage points, per annum) and 86% of its India Large-Cap peers.