Franklin Templeton MF followed a focused bottom-up approach: Roshi Jain

Avoiding momentum and focusing on quality at a reasonable price has helped Roshi Jain of Franklin Templeton Mutual Fund emerge a winner

Multi-cap funds have gained favour among investors and distributors in the past two years owing to their flexibility to invest in stocks across market capitalisations. Fund managers get the leeway to tilt the portfolio towards large-, mid- or small-cap shares depending on a host of factors. 

Franklin India Focused Equity, a multi-cap fund, has a large-cap lean, comprising about two-thirds of its portfolio. Fund manager Roshi Jain, however, clarifies that the fund is market-cap agnostic, with no pre-defined percentage for large- or mid- or small-cap allocation. 

“The fund dynamically manages its market cap allocation based on the risk-reward offered by the stocks at any point in time. It employs a bottom-up oriented process and if it is able to find more large-cap stocks meeting the fund house’s criteria, the portfolio will be large-cap weighted,” she explains. 

The large-cap bias seems to have stood the fund in good stead in the past year, given the battering received by mid- and small-cap stocks. For the 12 month period ended June 30, 2019, the scheme has returned 14.43 per cent, 7.8 percentage points higher than its benchmark IISL Nifty 500 TR INR. This was in a period when the mid- and small-cap indices fell 2.9 per cent and 13.6 per cent, respectively. January-March this year was the best quarter for the fund, with returns of nearly 9 per cent. The fund had assets of Rs 8,183 crore as on July 31, 2019.

Avoiding the temptation to chase momentum, looking beyond near-term pain, and identifying good quality companies going through near-term cyclical slowdown are some of the other factors that have aided fund performance, according to Jain. “The effort to create a diversified portfolio of stocks which provide medium-term growth at sustainable valuations has helped,” she says. 

While Franklin India Focused Equity is diversified across market caps, the margin for error is small as the portfolio is limited to 30 stocks and any wrong bets can make a significant dent in returns. Notably, the fund held an average of 35 stocks even in its earlier avatar as Franklin India High Growth Companies before the Securities and Exchange Board of India’s fund categorisation norms came into effect.

Focused funds aim to take concentrated bets at the stock and sectoral level. As a result, such funds could experience higher short-term volatility compared to their diversified multi-cap peers. Investors are told that the scheme has a higher risk than a normal diversified multi-cap fund, and the best approach is to invest through systematic investment plans, says Jain. 

“We don’t have the luxury of having a long tail and have to be a little more careful about which stocks enter the portfolio,” she says.

That said, Jain believes that since the fund is diversified across market capitalisation, the volatility evens out over longer periods of 3-5 years. “The standard deviation and beta of the portfolio are not higher than other diversified products over longer periods, and the discipline of sticking to our investment philosophy ensures superior risk-adjusted returns,” says Jain. 

Franklin Templeton’s investment philosophy focuses on growth, quality, sustainability and reasonable valuations. And all investment opportunities are weighed against these criteria. “The objective of our portfolio is to look at sectors and stocks that are positioned well for the future from a medium-term perspective, those poised for sustainable growth and available at reasonable valuations. That’s the broader investment philosophy and everything else is an outcome,” says Jain. 

The fund house has a fairly strong research team comprising 11 equity analysts and four portfolio managers. Stock selection involves consideration of both quantitative and qualitative factors that could include assessing sustainability of business models of companies, quality of management and governance. 

“Each stock has its unique characteristics with respect to quantitative and qualitative attributes which are individually considered to determine if they fit our investment framework,” says Jain.

However, despite its focus on quality, the fund has faltered at times. A case in point is its holding in Vodafone Idea, which shed 66 per cent in the year to June 30, 2019. The fund is currently underweight on consumer staples and overweight on health care and telecom. 

Jain believes the economy has seen significant structural reforms over the past few years. And, while that may have led to short-term slowdown, it has laid the foundation for a much-improved economic cycle for the future. “We appreciate that the government is focused on structural reforms and in making India an attractive investment destination while ensuring that fiscal discipline is maintained. Over the medium term, I believe India has structural strengths that make it well-positioned to grow and if the government continues the path of reform it augurs well for the markets,” she says.