imgbd Fund Focus: Franklin India Prima Plus

Steady performer moves into top gear

Anand Radhakrishnan, CIO - Franklin Equity, Franklin Templeton Investments, India


20th July 2016

In a nutshell

After two strong calendar years of robust alpha and high 2nd quartile performance, Franklin India Prima Plus has moved into top gear in 2016 with a top quartile YTD performance. As Anand demonstrates, this creditable performance is built on multiple alpha drivers across stocks and sectors - a truly well rounded performance. Read on as Anand shares his perspectives on sectors and themes he sees as alpha drivers going forward.

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WF: After 2 calendar years of strong alpha and a high 2nd quartile performance, this year has started on an even better note, with a top quartile performance on a YTD basis, so far. What factors are driving the fund's recent outperformance?

Anand Radhakrishnan: One key factor that has helped the fund performance is the growth of the underlying companies. Even during the challenging environment of moderate economic growth and struggling corporate earnings growth, what we have generally observed is on an average portfolio companies have delivered higher sales and higher profit growth than the broad market, which has helped the performance of the stocks. So that is primary reason.

The secondary reason is that over a period of last 3, 4 years market has valued certainty more than uncertainty. Which means that steady and predictable income is valued much more than the volatile income. So some of the ratings of the companies have also gone up due to this. While earnings growth is better, I think their valuations ratings have also got better over the last 3 years, which has led to outperformance of the portfolio versus benchmark.

WF: Does your attribution analysis show any specific stock or sector calls that have contributed significantly to alpha?

Anand Radhakrishnan: It is broad based, and not concentrated on any one sector. We have had few good picks in large as well as midcaps. For example, in the large cap space we have good outperformance from banking sector and our key positions have been in banks like IndusInd Bank, Kotak Bank and Yes Bank - all of which have done very well over the last few years. Similarly some of exposures in the auto and auto ancillary spaces have been key alpha contributors - these include stocks like Eicher, Amaraja, and Mico Bosch, all of which delivered good performance. In the tech sector, we had good alpha contribution from Infosys and Cognizant. In the pharma space, Torrent Pharma and Cadila have been key alpha generators. In the consumer space, its Marico and Pidilite. So, as you can see, it's a broad mix across sectors and market cap sizes.

WF: Which are your key overweight sectoral positions and why? What are your biggest underweights and why?

Anand Radhakrishnan: Generally, we don't take conscious overweight or underweight positions on a sectoral basis. We keep buying stocks we like and in the nature of that we tend to get certain large exposure to specific sectors. Current heavy exposures include banks. We think some of the banks will continue to deliver much higher growth than the broad market as well as the banking sector average, predominantly in the private sector space.

We also have good exposure to some of the discretionary plays like auto, auto ancillaries where we have a 12% exposure. We think that the urban consumption trend is improving and therefore some of these stocks have positive tail winds in that space.

The third sector where we have high exposure is Information Technology - we may technically call it as underweight but we have 10.5% position in IT. I think general fears on global growth and also more moderate growth guidance have kept the valuations of this sector at very reasonable levels. And the large cash flows and very low financial leverage in the balance sheet makes these companies pretty interesting to invest in, at least the high quality names within that.

Some of the other exposures are in some of the cyclical names like cement and construction space, but they are not a very high percentage of the portfolio. The sectors where we have least exposures include global cyclical which includes metals, oil & gas and some of the utilities as well.

WF: Talking about banking in specific, what is your take on PSU banks : are they value picks for you or value traps?

Anand Radhakrishnan : It is never so black and white in that sense. We have historically preferred private sector banks, as we believe they are capable of growing much faster than the sector average. That said, there are times when PSU banks do offer interesting tactical opportunities. We have seen lately excessive stress on their balance sheets translating to excessive stress on their stock prices. At such times, they do offer tactical investment opportunities. But, unless there is a structural change in the way these banks are run, we are unlikely to become structural bulls in the PSU banks space.

WF: How have you been calibrating your exposure to large and mid caps in the last 12-18 months? Is there a conscious top-down strategy to set allocations to market cap segments?

Anand Radhakrishnan: Yes, we do have a top down overlay, in terms of allocation between large cap and mid and small caps. And that overlay being not less than 70% in large cap and not more than 30% in mid and small cap. So these are the two boundary conditions under which the fund operates.

WF: But then you can go between 0 and 30 in midcaps depending on your view. Has the view been changing a lot?

Anand Radhakrishnan: It has not been changing too dramatically. Our belief is that there are enough opportunities in both the large and midcaps spaces, where we can invest at valuations we are comfortable with. Second, we have been selling some of the stocks which have become expensive on a valuation basis and trying to shift allocations towards where we find little more value. This has to happen without dramatic compromise on the other parameters like quality growth etc., because every time you move from one stock to other it should not come a massive downgrading of quality or growth. So while valuations maybe cheaper you have to consciously make sure that such cheap valuation is not coming at a cost. I think that has been a bit challenging but fortunately, the number of stocks in the mid and small caps being pretty wide there seems to be enough maneuverability around that. So we have not materially brought down mid cap exposure despite the massive run up we have seen in the last 3 years.

WF: These past few years (since 2011) have seen alternate calendar years of strong and tepid markets, with your fund's absolute return also mirroring this trend. Going by this, CY2016 should be a strong year, to keep the trend intact. Are there reasons for you to believe that the second half of this calendar year will see strong equity performance?

Anand Radhakrishnan: One reason for 2HY of this calendar year to be good for markets is it does look like finally that earnings growth is gathering some momentum. So in all probability the third and fourth quarter of the calendar year will have a better earnings growth than the first and second quarter. And therefore the market may remain well supported and strong during this phase. In the first half, we did not expect such volatility. The first two months took markets by surprise because there was a global sell off on emerging markets which accelerated in that period. Oil touched a new low, and commodities bottomed.

But most of it is now behind us I think. So it does look like volatility in the second half can hopefully be lower than what we saw in the first half.

WF: Some experts believe that while economic outlook is becoming more positive, there are far fewer value picks in a market that trades at 18x 1 year forward earnings. Are valuations a concern? Are we driving up good stocks into expensive territory too early in the economic recovery cycle?

Anand Radhakrishnan: That happened in 2014, when the new government came in. There was euphoria associated with the new government and the scale expectation of very quick economic recovery which did not happen and subsequently we have seen certain deflation in value in some of the cyclical names - including big names in PSU banks, engineering, construction etc. So initial expectations were unrealistic or quite optimistic which subsequently got watered down because economic problems were deeper than what markets had priced in. I think that round of correction has already happened. Even today, many of these cyclicals are some 30-40% lower than the 2014 highs. That froth having gone away is a source of comfort, especially as we see earnings recovery going forward.



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