This month, senior fund analyst Himanshu Srivastava takes a look at two equity funds from Franklin Templeton Asset Management India.
Though performance needs to improve in both funds, we believe that this fund house ranks among the best asset managers in the country. The team is experienced and stable and follows a research-driven investment approach with a focus on reasonably valued stocks.
The investment process is research-intensive and relies heavily on a bottom-up approach. Portfolio managers and analysts jointly decide on the coverage list where they look for growth companies that fit their qualitative requirements.
Only companies that have durable competitive advantages versus peers, sustainable business models, strong entry barriers, able management teams, and good corporate governance standards are included in the coverage list. This is followed by quantitative analysis in which analysts gauge companies using a combination of DCF models and quantitative parameters relevant to the sector. Analysts create sector based model portfolios which are then combined by the research head to create market-cap-based portfolios.
The fund manager uses these model portfolios as his initial reference point. He invests in stocks he believes have good earnings growth potential. He is valuation-conscious and avoids areas of the market which in his opinion are richly valued. He would not shy away from investing in beaten-up growth stories and out-of-favour companies that face near-term headwinds but are fundamentally sound.
The managers invest in stocks with a long-term horizon. Taking cash calls is not a part of the investment strategy.
Franklin India Equity Advantage Fund
- Category: Flexi Cap
- Fund Manager: Lakshmikanth Reddy
- Star Rating: 3 stars
- Analyst Rating: Bronze
- Note: The change in the fund’s investment mandate needs to be watched closely
The change in the fund’s investment mandate will change its nature, portfolio construction, and probable outcome. While earlier, the manager plied a fluid investment style with regards to allocation in large-, mid-, or small-cap stocks; henceforth, as per the investment norms of "large- and mid-cap" category, the fund must maintain at least 35% of assets in large- and mid-cap stocks respectively, thus limiting the manager’s degree of freedom to that extent.
However, the other aspects of the portfolio construction would remain consistent. The fund will continue to be style-agnostic, which means it will not follow any pre-specified style (growth or value). For instance, the manager can invest in a restructuring company which is coming out of a temporary downturn, in a value opportunity, or an arbitrage opportunity such as mergers and acquisitions. While investing, the manager can increase exposure to large- and mid-cap stocks over 35% depending on his view on both the segments. Essentially, he may increase the exposure of mid-cap stocks during the early part of the recovery cycle or if their valuation turns attractive. But when the economy is in a mature phase of recovery, their exposure would be reduced (but maintaining a minimum exposure of 35%) to take some risk out of the portfolio.
Currently, the portfolio is tilted towards large caps as the manager is more comfortable with their valuations.
You can read the brief analyst note here
Franklin India Taxshield Fund
- Category: ELSS
- Fund Manager: Lakshmikanth Reddy and R Janakiraman
- Star Rating: 4 stars
- Analyst Rating: Bronze
- Investment Style: Large Growth
- Note: Large-cap stocks continue to dominate the portfolio
The fund’s revised investment mandate provides managers the flexibility to construct the portfolio in a free-flowing manner without any bias towards a market segment or investment style.
The strategy aims to have outcomes that on a quantifiable matrix have a superior risk matrix compared with either a peer midcap or a peer large-cap fund over a longer time frame. The exposure to a particular market segment (for example, large, mid, or small) in the portfolio is decided based on the stage of the economic cycle and relative valuations of stocks.
Having said this, fund continues to have a large-cap bias in the portfolio despite the change in its strategy. As of April 2018, the large-cap stocks accounted for 80% of the portfolio. For constructing portfolios, the manager can invest in a restructuring company which is coming out of a temporary downturn, in a value opportunity, or an arbitrage opportunity such as mergers and acquisitions.
The fund also tends to be more concentrated in its high-conviction ideas compared with a typical peer. As of April 2018, the top five holdings Kotak Mahindra Bank, HDFC Bank, Axis Bank, Mahindra & Mahindra, and Hindalco constituted around 30% of the fund’s portfolio, with the top holding, Kotak Mahindra Bank, accounting for 8.07%. The managers also do not shy away from taking contrarian calls.
While the bottom- up approach is more prevalent, there is also a top-down overlay occasionally.
You can read the brief analyst note here
