A look at 2 asset managers from Franklin Templeton

By Himanshu Srivastava |  14-08-19 | 
 
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About the Author
Himanshu Srivastava is a Research Analyst with Morningstar. He would like to hear from you, but cannot give financial advice.

The investment team at Franklin Templeton Mutual Fund comprises of four portfolio managers and 12 analysts, of which five act as co-managers. While there has been some turnover in the analyst team, the exiting members were replaced by equally experienced and capable analysts.

It is an experienced, well-resourced, and high-calibre team. S. Rajah (CIO, Asian equities) and Anand Radhakrishnan (CIO, India equities) are at the helm of affairs.

R JANAKIRAMAN

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 are compiled by the research head to construct a diversified small/mid-cap portfolio.

Janakiraman uses the 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. As it is difficult to forecast earnings in small/mid-caps over a long-term horizon given the unpredictable nature of their cash flows, he uses historical five-year data as a yardstick to project five years ahead.

He tends to steer clear of heavily leveraged bets, but is not very rigid on valuations, so long as the company fulfills his investment criteria.

Cash calls are capped at 10% of the portfolio.

He uses both top-down and bottom-up approaches, with the latter being more prominent. 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.

Franklin India Smaller Companies Fund 

  • Star Rating: 4 stars
  • Analyst Rating: Silver
  • Category: Equity - Small Cap
  • Fund Manager: R Janakiraman
  • Date of Analysis: December 2018

He invests a minimum of 75% of assets in stocks from the small/mid-cap segment, of which, as per SEBI mandate, more than 65% will be invested in small caps. Large caps account for 15% of the portfolio and are mainly for managing liquidity.

Brief analyst note

Franklin India Prima Fund

  • Star Rating: 5 stars
  • Analyst Rating: Gold
  • Category: Equity - Mid Cap
  • Fund Manager: R Janakiraman
  • Date of Analysis: December 2018

Janakiraman’s investment process is visible in the portfolio construction. He plies a predominantly mid-cap strategy with exposure to mid-cap stocks typically falling in the range of 70%-80%. He invests in large-cap stocks primarily in sectors where he is unlikely to find good-quality mid-caps.

Brief analyst note

LAKSHMIKANTH REDDY

Portfolio managers and analysts jointly decide on the coverage list, seeking growth companies that fit their qualitative requirements. Only companies with 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 firms using a combination of discount cash flow models and quantitative parameters relevant to the sector. Analysts create sector-based model portfolios, which the research head then combines to create market-cap-based portfolios.

Lakshmikanth Reddy uses the model portfolios as his initial reference point. He invests in stocks he thinks have good earnings growth potential.

He plies a style-agnostic approach, which means it will not follow any pre-specified style (growth or value). He would not shy away from investing in beaten-up growth stories and out-of-favour firms that face near-term headwinds but are fundamentally sound. At the same time, he doesn't mind paying a premium for a company offering robust growth prospects. The managers invest in stocks with a long-term horizon. Taking cash calls is not a part of the investment strategy.

Franklin India Taxshield

  • Star Rating: 4 stars
  • Analyst Rating: Bronze
  • Category: Equity - ELSS
  • Fund Manager: Lakshmikanth Reddy
  • Date of Analysis: August 2019

Reddy runs the fund 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 mid-cap or a peer large-cap fund over a longer time frame. The exposure to large-, mid-, or small-cap stocks in the portfolio is decided based on the stage of the economic cycle and relative valuations of stocks. Essentially, Reddy would increase exposure to 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 to take some risk out of the portfolio.

The portfolio currently has more cyclical stocks and is value-biased. The fund also tends to be more concentrated in its high-conviction ideas compared with a typical peer.

Brief analyst note

Franklin India Equity Advantage Fund

  • Star Rating: 3 stars
  • Analyst Rating: Bronze
  • Category: Equity – Large & Mid Cap
  • Fund Manager: Lakshmikanth Reddy
  • Date of Analysis: August 2019

As per the investment norms of the “large- and mid-cap” category, the fund maintains at least 35% of assets in large- and mid-cap stocks in either. Currently the portfolio is more value-focused than was the case one year ago. Subsequently in terms of portfolio positioning, stocks from the cyclical space such as wholesale banks and defensive names from the utilities sector dominate the portfolio.

Within the defined limits, Reddy would increase exposure to 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 to take some risk out of the portfolio. Currently, the portfolio is tilted towards large-caps.

Brief analyst note

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