Franklin Templeton India has been at the centre of controversy due to its decision to shut down six debt funds in April 2020 due to liquidity constraints in the bond market. While this event does not have any direct bearing on the asset manager's equity schemes as the equity team operates under a separate structure, some of its equity funds have been underperforming lately due to the investment style being out of favour.
We recently reviewed three equity funds of Franklin Templeton Mutual Fund. Here is a brief overview and analysis of these funds.
Franklin India Focused Equity Fund
- Category: Focused
- Analyst Rating: Bronze
- Star Rating: NA
- Date of Analysis: December 2020
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Fund Overview
Roshi Jain is the lead manager of this fund since July 2020. 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 discounted cash flow models and quantitative parameters relevant to the sector. Analysts create sector-based model portfolios that are then combined by the research head to create market-cap-based portfolios.
Fund manager Roshi Jain uses these model portfolios as her initial reference point. She scouts for sectors and stocks with structural drivers, high growth, and reasonable valuations. She prefers companies that focus on organic growth rather than inorganic and have potential to post strong incremental returns on invested capital over the long term. Jain takes contrarian bets with a long-term horizon if the stock has been affected negatively because of external factors. Taking cash calls is not a part of the investment strategy. In our opinion, the process is sound and workable over the long term, amid facing intermittent challenges caused by the strategy's structure.
Franklin India Prima Fund
- Category: Mid Cap
- Analyst Rating: Silver
- Star Rating: 4 stars
- Date of Analysis: December 2020
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Fund Overview
Janakiraman has helmed this fund since February 2011. 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. The investment team places strong emphasis on qualitative aspects such as managerial strengths and corporate governance; also, rigorous business analysis is performed to understand the growth prospects of the industry, its competitive landscape, entry barriers, and scalability prospects.
Janakiraman selects companies that can generate consistent and sustainable earnings growth over a business cycle and have low leverage and reasonably high ROEs. He is aware that it is difficult to forecast earnings in small/mid-caps, hence, he uses historical five-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. That said, the strategy is not without risks. A valuation-conscious approach and the manager’s inability to play momentum will hold the fund back during speculative or bull markets.
The fund also struggled because of a few investment calls that would have been best avoided. A more prudent approach would help in this regard. Although the strategy has the potential to deliver superior performance over the long haul, it is tagged with inherent biases along with higher volatility.
Franklin India Smaller Companies Fund
- Category: Small Cap
- Analyst Rating: Silver
- Star Rating: 3 stars
- Date of Analysis: December 2020
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Fund Overview
Janakiraman took over its reins in February 2011. Under him, the fund has outperformed 70% of its category peers and ranks in the category's second performance quartile over the managers' tenure, with relatively lesser volatility.
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.
Janakiraman selects companies that can generate consistent and sustainable earnings growth over a business cycle, have low leverage, and have 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 five-year data as a yardstick to project five years ahead. He is not very rigid on valuations, so long as the company fulfills his investment criteria. We believe the process is robust and Janakiraman can make it work.
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