The Morningstar Analyst Rating for Funds is a forward-looking analysis of a fund. Morningstar has identified 5 key areas crucial to predicting the future success of a fund: People, Parent, Process, Performance, and Price. The pillars are used in determining the Morningstar Analyst Rating for a fund.
Morningstar Analyst Ratings are assigned on a 5-tier scale running from Gold to Negative.
Gold, Silver, and Bronze, all indicate that our analysts think highly of a fund; the difference between them corresponds to differences in the level of analyst conviction in a fund’s ability to outperform its benchmark and peers through time, within the context of the level of risk taken over the long term (defined as a full market cycle or at least 5 years).
Here are six equity funds that have been given a Silver rating by our analysts over the December to March period.
ICICI Prudential Multi-Asset Fund
- Category: Multi Asset Allocation
- Date of Analysis: March 2020
- Morningstar Analyst: Nehal Meshram
- Star Rating: 4 stars
- Fund Manager: Sankaran Naren
The fund manager follows an aggressive contrarian strategy and is willing to buy companies that are in the midst of a short-term crisis or transitions but remain fundamentally sound. He to dynamically manages the equity and debt portion based on market valuation and maintains the gross equity level of 65%. Taking cash calls is integral to the strategy, but the manager doesn't go beyond 35%.
He uses an in-house model based on the historical price/book value of the markets to determine the fair valuation. The model uses the deviation between its assessment of the fair valuation and the market present valuation to indicate the size of the cash call.
The manager evaluates sectors from a top-down perspective, favouring those with attractive fundamentals and shifting away from ones where he thinks valuations are stretched. 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.
Read the brief analyst note here
Franklin India Equity Fund
- Category: Multi Cap
- Date of Analysis: March 2020
- Morningstar Analyst: Himanshu Srivastava
- Star Rating: 3 stars
- Fund Manager: Anand Radhakrishnan
The fund’s portfolio largely remains stable in terms of allocation, nature, style, and diversification. Both large and mid/small-cap stocks form part of the portfolio, with more than a 70% allocation to large caps.
The fund manager is benchmark-agnostic while constructing the portfolio and selects stocks using a bottom-up approach. This, coupled with his penchant for contrarian bets, result in a portfolio that is often dissimilar to that of its typical peer. Its overweight position in the telecom sector versus the category and benchmark is a case in point. Similarly, his investment in healthcare in 2017 bears out his willingness to invest against the grain. Radhakrishnan is building exposure in the financial services sector. He admits that his underweighting in the sector had an adverse impact on the fund in 2019, as in the absence of playable ideas in the general economy, it became the go-to sector. However, he continues to have reservation towards NBFCs.
That said, he prefers private-sector entities over their public-sector counterparts, given his belief that the former offer more robust business models and superior operational efficiencies. The portfolio is also overweight in the consumer cyclical sector, which has seen significant downturn. The challenges would continue for the fund until there are signs of economic growth, value bets being rewarded, and markets stabilizing.
Read the brief analyst note here
HDFC Mid-Cap Opportunities Fund
- Category: Mid Cap
- Date of Analysis: December 2019
- Morningstar Analyst: Kavitha Krishnan
- Star Rating: 4 stars
- Fund Manager: Chirag Setalvad
The fund manager is benchmark-agnostic and can go against the grain based on where he finds ideas that fit his portfolio. This has resulted in a portfolio that often differs significantly from the IISL Nifty Midcap 100 TR Index and the category norm. The portfolio follows a diversified approach and consists of around 75 stocks, with the top 10 holdings constituting around 30% of the portfolio. Individual holdings typically range around a maximum weight of 4%.
The manager has realigned the portfolio slightly over the past year based on the market conditions and valuations. Turnover has increased over the past couple of years owing to this change.
Financial services, cyclicals, and industrials have consistently remained amongst the top sectors here; the three sectors put together constitute more than 50% of the portfolio. The fund also has a significant exposure to the cyclicals sector, but has not held real estate and telecom stocks since 2012, and never any cement stocks.
The fund typically tends to do well during periods of market correction as well as during periods of tight liquidity, and this is reflected in its performance.
Read the brief analyst note here
Franklin India Smaller Companies Fund
- Category: Small Cap
- Date of Analysis: December 2019
- Morningstar Analyst: Himanshu Srivastava
- Star Rating: 4 stars
- Fund Manager: R Janakiraman
Fundamental research forms the crux of the investment process. The coverage list for small/mid-caps is built by the portfolio managers in conjunction with the analysts. When selecting companies, the investment team places strong emphasis on qualitative aspects such as managerial strengths and corporate governance standards; also, rigorous business analysis is performed to understand the growth prospects of the industry, its competitive landscape, entry barriers, the company’s market share, and scalability prospects of the business, among others.
Analysts construct sector-based model portfolios comprising the best ideas from stocks in their investment universe, which in turn is compiled by the research head to construct a diversified small/midcap portfolio. The fund manager uses this model portfolio as his initial reference point, and he selects companies that can generate consistent and sustainable earnings growth over a business cycle and that have low leverage and reasonably high ROEs.
He is aware that it is difficult to forecast earnings in small/mid-caps over a long-term horizon given the unpredictable nature of their cash flows; hence, he uses historical 5-year data as a yardstick to project five years ahead. He is not very rigid on valuations, so long as the company fulfils his investment criteria.
Read the brief analyst note here
Franklin India Prima Fund
- Category: Mid Cap
- Date of Analysis: December 2019
- Morningstar Analyst: Himanshu Srivastava
- Star Rating: 4 stars
- Fund Manager: R Janakiraman
The fund manager’s investment process is visible in the portfolio construction. His benchmark-agnostic approach coupled with his bottom-up stock-picking results in a portfolio that is distinct from that of the benchmark index or peers. He plies a predominantly mid-cap strategy with exposure to mid-cap stocks typically falling in the range of 70%-80%.
Janakiraman invests in large-cap stocks primarily in sectors where he is unlikely to find good-quality mid-caps. He also invests in beaten-down stocks or out-of-favour growth companies, especially when it is affected by external factors rather than deteriorating fundamentals.
He uses both top-down and bottom-up approaches while investing, with the latter being more prominent. He continues to avoid investing in companies having excessive leverage in their books.
Like in large caps, in mid- and small caps, too, the returns have been skewed over the past two years. This provided the manager an opportunity to bring down the portfolio valuation. He pruned exposure to a few of those stocks that did contribute towards returns but had gotten expensive. But then he continues to stay convinced with the prospects of his high-quality picks from the engineering space. Although the sector has been going through a rough patch for two to three years due a cyclical downturn, he believes his quality focus will be rewarded once there is a recovery in capital expenditures cycle.
Read the brief analyst note here
Franklin India Focused Equity Fund
- Category: Focused
- Date of Analysis: December 2019
- Morningstar Analyst: Himanshu Srivastava
- Star Rating: 4 stars
- Fund Manager: Roshi Jain
The portfolio continues to be positioned to benefit from a turnaround in economic growth. The fund manager has been investing predominantly in sectors and companies dealing in the domestic space rather than export-oriented. Also, since taking contrarian bets is integral to the strategy, she has been maintaining an overweight position in telecom sector for about four years now. The exposure to healthcare sector has also gone up as it has started fitting into her investment thesis after recent headwinds. As a tactical exposure to hedge domestic as well as global volatility, she had been maintaining a relatively higher exposure to energy sector.
Jain is flexible in her investment approach while constructing the portfolio and invests in stocks from across market segments without any bias. She doesn't shy away from taking significant sector and stock bets, and hence the portfolio is concentrated in nature.
Jain is cognizant of the underlying risk in this strategy and takes requisite measure to mitigate it. For instance, while constructing the portfolio, she ensures that it doesn't have significant exposures in two sectors that are fundamentally aligned. So, given high exposure to banking stocks, she has avoided investing in metals and mining companies. Further stock bets are taken in liquid names so that they can be easily liquidated in the event of an investment call going wrong.
Read the brief analyst note here
