Understanding an underperformer

By Morningstar |  12-07-19 | 

I have an investment of Rs 1,10,000 in Franklin India Bluechip Fund (dividend option). In view of the recent performance of this fund, should I sell?

- Saxenaan

The performance of Franklin India Blue Chip Fund has been below expectation for a while now.  However, the reasons of the same are not hard to guess. It’s not that the manager has deviated from his investment style or he is trying to do something different which has hurt fund’s performance. In fact, he is religiously sticking to his investment mandate and style, which has been out of favour for some time.

Our conviction in the fund stems from the fact that it is managed by a very experienced manager who is backed by one of the best equity investment team’s in the industry. Plus, the investment strategy is robust, research driven and quality focused. With these intact, we expect the fund to make a turnaround sooner than later.

However, what has not worked for the fund is the manager’s quality focus investment approach, which led him to not invest in few stocks that doesn’t qualify on his quality criteria. However, some of these stocks have done well over the last few years, and since they are index heavy weights, resulted in the fund’s relative underperformance vis-à-vis benchmark index. Also, his strategy of taking contra bets has proved to be counterproductive. Additionally, his investments in few stocks, which have high weights in the portfolio, didn’t deliver desired results.  Hence, it’s a mix of factors that has led to the fund’s underperformance.

From a portfolio construction stand point, regular review is very important, and if a fund is not able to play the role it is supposed to play in the portfolio, then there is no harm in replacing it with another fund which is more apt for the portfolio. However, given it would involve restructuring of the portfolio, we recommend you opt for the services of a financial adviser, who would be in a better position to guide you through this process.

Read the analyst view here.

I have been investing in ABSL Focused Equity for 4 years. The performance of this fund was not good. Do I need to switch the fund?

- Sajuin

ABSL Focused Equity is a high conviction strategy that invests in a 30-stock portfolio. You will tend to see some volatility in the fund’s performance given the concentrated nature of the fund. Having said that, the manager ensures that he invests in companies that are able fit in with his strategy. The fund’s performance in 2015 and 2017 remained subdued and this is probably why you are seeing an average showing on the fund over the past 4 years. We think that the fund is a strong proposition and that long-term returns will average out, thus reducing the impact of the fund’s underperformance.

I would like to know expert comments on ABSL funds. Over the last 3 years their funds are under performing their peers. ABSL Small Cap (10K SIP from Jan 2017) is in negative. ABSL Frontline Equity (10K SIP from Jan 2017) have low returns. ABSL Pure Value (10K SIP from Jan 2017 to Jan 2019) is also in the negative. Should I hold?

- Jay Chadderwala

The ABSL Frontline Equity fund is led by an extremely efficient manager and currently carries a Morningstar analyst rating of Gold. The Pure Value fund is also managed by Manish Patil and the Small Cap fund by Jayesh Gandhi.

All three funds have remained amongst the top performers in its category on a historical basis.

Having said that, the thee funds underperformed its peers as well as its benchmark in 2018 and fell in the bottom of the pile within their respective categories during the time period between Jan 2019 and May 2019. The impact of this underperformance is reflected in the cumulative performance of the fund which has turned out to be a negative experience for a lot of investors.

However, the AMC was quick to course correct and we should see this situation changing.

You can read our analyst views on these funds here.

Is large AUM bad in focused funds? What will happen in the long run? 

 - Jimmy

We agree that with the increase in the assets under management (AUM), the risk to the portfolio also increases. However, the most important aspect of the concentrated portfolio is the fund manager’s skills and his focus on high quality stocks. Finally, if the investor has a moderate risk appetite and fine with extra risk because of the concentrated portfolio, he can invest in the fund.

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