5 tax-saving funds our analysts cover

By Morningstar |  04-08-22 | 
 

These Equity Linked Savings Schemes (ELSS) have been analysed over the past year and are presented as per the date of analysis, the latest given priority. Barring one Silver, all have a Neutral rating.

The name of the fund is linked to a detailed report which displays portfolio information and performance data, as well as a summary of the analyst's views on that specific fund.

ICICI Prudential Long Term Equity

  • DATE OF ANALYSIS: August 2022
  • ANALYST: Melvyn Santarita
  • ANALYST RATING: Neutral
  • STAR RATING: 4 stars
  • FUND MANAGER: Harish Bihani
  • MARKET-CAP EXPOSURE: Large-cap bias

Harish brings in his own style of investing into this fund. He relies on the investment framework that he has built based on theme, fundamental metrices and bucket strategy approach.

He breaks his entire investment universe into three buckets. Bucket A consists of companies which have proven and stable business model, run by a competent leader, are market share gainers and have a good growth prospect over the next three to four years. Bucket B is composed of companies where the current earnings are below normal, but the management has a sound plan for earnings recovery. The businesses in this bucket have a good history of attractive long-term returns on capital but are trading at low valuations based on their normalised earning power. This is that part of the portfolio which might take a little longer to perform. The portfolio is therefore built from stocks belonging to these two buckets. Lastly, bucket C have companies which the manager tries and avoid. These companies have weak balance sheet, cash flows, fragile business models or are exposed to macro risk. He believes by avoiding such companies, over time the portfolio can generate good and steady returns without exposing the fund to unwarranted risk. Bihani has also laid down a detailed and active review framework for his portfolio to ensure that his investments don't breach his selection criteria.

Harish relies primarily on his bottom-up stock-picking abilities and is confident this approach will work well over a period of time. To that extent, he avoids taking big calls based on macro environment or on markets unless he believes that the market is over-heated. While Bihani is mindful of valuations, he wouldn't mind paying a premium for a company as long the numbers meet his growth criteria.

This approach is relatively different from other managers from the fund house like Naren and erstwhile manager Mrinal, who basically ran a value driven investment style. That said, he looks for the catalyst for value investment very carefully, while investing in value stocks.

Harish is not benchmark-agnostic when it comes to investing. But there is an internal risk committee which looks at the sector allocation relative to the benchmark on a regular basis. In case there is any significant sector deviation, then this must be approved by the CIO both on the upside as well as downside.

His investment style is long-term in nature, and therefore, he adopts a buy and hold approach with no tactical portion in the portfolio. A notable aspect of the strategy is manager's unwillingness to take much risk in the portfolio. This may hold the fund back during momentum driven markets but help when things are adverse. It's a well laid down process with various yet significant elements attached. The execution is therefore important here and that remains an untested aspect as of now.

SBI Magnum Long Term Equity

  • DATE OF ANALYSIS: February 2022
  • ANALYST: Himanshu Srivastava
  • ANALYST RATING: Neutral
  • STAR RATING: 3 stars
  • FUND MANAGER: Dinesh Balchandran
  • MARKET-CAP EXPOSURE: Predominantly a large-cap offering managed with a valuation-conscious approach. Roughly 60%-70% of the portfolio is invested in large-cap stocks.

While evaluating stocks, Dinesh uses valuation matrices such as EV/EBITDA, P/E or P/B among others, whichever is apt for a given sector. This is then supplemented by the outcome of an internal quantitative model. That said, he does not mind being flexible on valuation in areas where he is confident on the underlying theme and its long-term growth prospects. The portfolio is constructed with a benchmark-aware approach.

A combination of top-down and bottom-up styles is used for stock selection. Balchandran prefers stocks that display change in margin and have a margin of safety and good earnings outlook over the long term, but he avoids highly leveraged businesses. He is flexible with his stock picks and won't shy away from investing in a firm that is not a best in class but has a good risk/reward profile.

While a benchmark-aware approach can theoretically reduce the risk of relative underperformance, the valuation-consciousness will result in the fund struggling in growth-oriented markets, as it has been between 2017 and early 2020. The investment approach is common enough, and its execution will play a key role in determining the fund's long-term success.

So far, the execution of the strategy hasn't been encouraging.

Portfolio construction is a combination of different factors. One part of the portfolio consists of companies where the manager is confident on the underlying theme. Here, he is willing to be flexible with valuation if he believes that the growth runway will be there for the long haul. This is more of a top-down play and the manager will continue to hold to these investments while his thesis is intact. His investment in the insurance sector is a part of this portion.

The second and more significant part of the portfolio is a cyclical portion. Here, the manager is valuation-conscious and counts on the cycle to reverse meaningfully. His investments in industrials, autos, and corporate lending are part of this portion.

Dinesh believes that his style requires investing for a long haul and hence he has a three- to five-year investment horizon. He is willing to endure short-term pain for long-term gains. That said, currently he is adopting a conservative approach while constructing the portfolio as he is not sure about the prospect of economic growth. He will build exposure further, when there are more visible and apparent signs of economic turnaround, broad-based growth, and the earnings cycle turning positive.

However, this conservative approach held the fund's performance back in 2021 with the markets witnessing a sharp bull run.

Mirae Asset Tax Saver

  • DATE OF ANALYSIS: January 2022
  • ANALYST: Nehal Meshram
  • ANALYST RATING: Silver
  • STAR RATING: 5 stars
  • FUND MANAGER: Neelesh Surana
  • MARKET-CAP EXPOSURE: The fund has traditionally held a significant stake of around 70%-80% in large companies, focusing primarily on high-growth stocks at reasonable price.

This strategy is focused on identifying stocks with a GARP framework. The investment philosophy of the fund is built on three core principles: quality businesses with stable earnings, strong management, and attractive valuation. The process includes both quantitative and qualitative stock screening with bottom-up stock-picking.

The sector selection is done through a top-down approach mainly based on growth prospects. Analysts then assess stocks at the industry and company levels and focus on key drivers such as returns on capital employed, returns on equity, and EBITDA margin. Within the framework, there is a lot of emphasis on qualitative analyses like management quality and execution capabilities. These are quantified by evaluating the trailing 10-year track record, which helps in removing subjectivity.

While selecting mid-cap stocks, the manager typically looks for slightly higher ROE and growth rates as compared with large-cap stocks, given these stocks come with liquidity and other risks. There is a further focus on valuation, which becomes a key driver behind entry and exit timing. This valuation process along with quantitative factors, drive the conviction level in the stock, which helps to exclude companies where business fundamentals are not solid. Meeting with company management is vital here to gain company-specific and industry information. The strategy holds a well-diversified portfolio with a long-term perspective, helping the fund outperform over the long haul.

The fund's strategy is to invest across sectors and themes. It has a well-diversified portfolio, free from a strong bias to any particular sector and without excessive exposure to a single stock. The fund maintains a diversified portfolio, with an average of 60-65 equities, minimising concentration and liquidity risk.

Alpha is generated mainly through stock selection rather than sector rotation. The portfolio manager is willing to ride through periods of adversity and stick to his long-term views, exhibiting patience and conviction in the stocks in which he is invested.

Taking cash calls is not part of the strategy. Given the manager's focus on companies with high cash flows and high return on equity, he has consistently remained underweight to real estate, infrastructure, and construction companies as these businesses typically don't have these traits.

Franklin India Taxshield

  • DATE OF ANALYSIS: January 2022
  • ANALYST: Himanshu Srivastava
  • ANALYST RATING: Neutral
  • STAR RATING: 3 stars
  • FUND MANAGER: Anand Radhakrishnan
  • MARKET-CAP EXPOSURE: Traditionally, in Franklin India Taxshield, 70% of the allocation has been maintained in large-caps and 30% in mid/small-cap stocks.

Anand seeks to manage this fund in a similar fashion as Franklin India Flexicap Fund.

He seeks companies with clean balance sheets and looks for steady businesses with sustainable competitive advantages that can generate healthy ROEs and ROCEs. A rather contrarian streak is also perceptible in the manager's stock picks. He will pare or exit positions he believes are expensive.

A valuation-conscious approach and the manager's inability to play momentum will hold the fund back during speculative or bull markets. Like other funds, this fund also struggled in the past owing to a few investment calls which could have been best avoided. Taking note of that, the investment team took measures and honed their security selection criteria to avoid investment mistakes.

Although the investment strategy is tagged with inherent biases along with higher volatility, Anand has been managing funds with a similar approach for a long time, and under him it has the potential to deliver superior performance over the long haul.

He is benchmark-agnostic while constructing the portfolio and selects stocks using a bottom-up approach. This, coupled with his penchant for contrarian bets, often results in a portfolio that is unlike that of the typical peer. For instance, his investment in the healthcare sector in 2017 bears out his willingness to invest against the grain. Broadly the portfolio will continue to have positioning which would help it to benefit from a pickup in consumption and an economic turnaround.

DSP Tax Saver

  • DATE OF ANALYSIS: August 2021
  • ANALYST: Himanshu Srivastava
  • ANALYST RATING: Neutral
  • STAR RATING: 5 stars
  • FUND MANAGER: Rohit Singhania
  • MARKET-CAP EXPOSURE: Given Singhania's investment style, the fund displays an apparent large-cap bias as it accounts for nearly 65%-75% of the portfolio with the balance in small/mid-cap stocks.

The manager uses sector-based model portfolios created by analysts as his initial reference point, and he plies an overlay by using the change in ROCE/ROE compared with a company's intrinsic growth and P/BV as an appropriate measure to evaluate stocks. Stress is laid on understanding a company's business model, expected cash flow, key business drivers, and the scalability prospects of the company and the sector in which it operates.

While investing, Rohit prefers businesses having improvement in the business cycle, good pricing power, with rising/high ROEs and cash flows. Additionally, he uses relative valuation measures to invest in stocks that are temporarily mispriced within a sector using relevant quantitative ratios and also invests a small portion of the portfolio in value stocks trading below half their book values. Although the manager is rooted to a bottom-up style, top-down factors are not entirely ignored as the macroeconomic scenario and government policies, combined with industry/sector analysis, are used to identify and overweight sectors that demonstrate strong pricing power.

Rohit implements an unconstrained, benchmark-agnostic approach without any bias towards a stock or sector while constructing the portfolio. He manages the fund with a rather aggressive investment style, which entails churning the portfolio frequently to capitalise from the investment opportunities arising in the interim. He will therefore not hesitate to increase or reduce allocations swiftly in response to rising and falling stock prices. Additionally, he believes in buying and selling huge amounts to make a meaningful difference in the portfolio.

Interestingly, the manager typically scouts for investment opportunities in large-cap names where he sees any trend emerging with regards to (for instance) cash flows or ROE. The mid-cap portion of the portfolio is fairly stable, which is in line with his belief that they need more time to deliver; this in turn necessitates a longer investment horizon.

He prefers constructing a diversified portfolio but doesn't shy away from taking significant exposure in his high-conviction picks whenever he identifies an opportunity. For instance, the exposure to top 10 stocks in the portfolio hovers in the range of 40%-50%. Despite that, the portfolio is usually more diversified than a typical category peer.

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