Fund manager Janakiraman’s benchmark-agnostic approach coupled with bottom-up stock picking results in a portfolio that is distinct from the benchmark index or peers.
At Franklin Templeton Mutual Fund, the coverage list for mid- and small-cap stocks is built by the portfolio managers in conjunction with the analysts. When selecting companies, the investment team places a strong emphasis on qualitative aspects such as managerial strengths and corporate governance standards. In addition, 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 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 5 years ahead. He is not very rigid on valuations so long as the company fulfills his investment criteria.
Franklin India Smaller Companies
The fund put up an excellent show in 2012 and 2013. But by and large, it has performed impressively under Janakiraman’s watch (February 2011 till date) and on the Morningstar Risk-Adjusted Returns front, it has outperformed 97% of category peers.
Even if the fund faces a slowdown, the fund manager’s focus on quality will help it bounce back. For instance, the fund delivered a poor second-quartile performance in 2015, with stocks such as such as Finolex Cables and Yes Bank faring poorly. However, they helped the fund deliver superior returns in 2016.
While the focus on quality is unwavering and the bent is on investing for the long haul, Janakiraman believes in some amount of flexibility. For instance, in order to accommodate the fund’s burgeoning size, he increased the number of holdings in the portfolio to 70-75 stocks from 40-50. He also lowered the concentration in its top 10 holdings to around 25% (as of November 2016) compared with roughly 45% earlier.
The fund’s portfolio depicts a small-cap bias. Janakiraman invests a minimum of 75% of assets in stocks from the small/mid-cap segment, of which around 50% is invested in small-cap stocks. Large caps account for 15% of the portfolio and are mainly for the purpose of managing liquidity.
You can view the analyst’s synopsis of the fund here: Franklin India Smaller Companies.
Franklin India Prima
The exposure to mid- and small-cap stocks largely falls in the range of 75%-80%. However, for some time now, the exposure to large-cap stocks in the portfolio has gone up. As of November 2016, the large caps accounted for around 33% of the portfolio. Janakiraman invests in large-cap stocks primarily in sectors where he is unlikely to find good-quality mid-caps.
Over the past 8 years, the fund underperformed the category average only once in 2015. That could be attributed to the poor showing by stocks such as Yes Bank and Finolex Cables. However, the same stocks helped the fund rebound in 2016 and outperform 66% of the competition.
You can view the analyst’s synopsis of the fund here: Franklin India Prima.