FundsIndia reviews: Franklin Build India

Well-poised for a growth story

If you are tired of watching the off-putting performance of infrastructure funds, then Franklin Build India may be one to provide you with some hope. While this multi-thematic fund’s three-year performance remains uninspiring, the fund has made itself conspicuous in the last one year, beating the broad equity market. The fund managed 17.7% in the last one year.

This is not only better than its benchmark CNX 500 by 5 percentage points but is far superior to the diversified fund category average of 9.5%. Other infrastructure funds managed an average 3%.

Investors who already have exposure to this fund can continue to hold it. If the India growth story were to find traction even a year later, this fund could be among the early beneficiaries, given its exposure to key themes, without taking excessive exposure to specific sectors.

Investors can watch its performance over the next 2-4 quarters before considering any fresh exposure. We have a hold call on this fund at present.

The fund
Franklin Build India may, on the face of it, seem like an infrastructure fund. But having seen the difficulties of keeping a narrow mandate, Franklin Templeton India wisely chose a much larger investment universe for this fund. The fund will invest in companies benefiting from the various building blocks of the economy; that would means infrastructure, resources, financial services, agriculture and themes that are proxy to social development.

You might think that’s pretty much what a diversified fund would invest in. That’s true to an extent. In fact, the fund has classified itself as a diversified fund and set itself a broad index – CNX 500 as its benchmark. We would also prefer not to compare the fund merely with other infrastructure funds, given its wider universe.

While it may not be wrong to say this fund’s universe is rather diversified, you are unlikely to see this fund take very high exposure to software, consumer themes or those that piggyback on the consumption story. Also, it is likely that this kind of fund would have more intense exposure to infrastructure, energy, engineering or cement sectors than pure diversified funds.

On the other hand, while financial services exposure will be its key theme, it may not go over-board on this theme, the way most diversified funds do.

In all, you might want to see this fund as much more than a regular infrastructure fund but short of being called a fully diversified equity fund. It other words, it will play multiple themes.

Performance
Franklin Build India’s diversified investment universe combined with astute stock picking ensured that it had a memorable 2012 that delivered 40% for the fund. While this was far higher than the 25% return that infrastructure and related theme funds managed, it was still not higher than the diversified equity funds’ average of 41%. Clearly, its bias for infrastructure-related themes did keep performance capped.

Interestingly, the fund did a good job of containing declines thus far in 2013, falling only 2.7%. This, despite a third of its assets being held in mid- and small-cap stocks of less than Rs 10,000 crore market capitalization. As a result, its one year return now looks better than many top diversified funds.

While these signs of improvement are encouraging, the fund’s three-year record, like most infrastructure theme funds, remains lack luster. Its rolling one-year return since its launch in September 2009 suggests that it beat its benchmark 67% of the times. While that record is decent, it is not sufficient to prove consistency in performance.

Portfolio
Franklin Build India’s portfolio would be an equity stock picker’s delight in a growth market. But not all the stocks it picked, valuations often playing a key, delivered well.

While stocks such as JK Lakshmi Cement and MindTree doubled over the course of the last one year, others such as Idea Cellular, Bayer Crop Science and Federal Bank also put up a strong performance and boosted portfolio returns. But stocks such as Amara Raja Batteries or Petronet LNG, failed to impress.

If you see equity markets ticking steadily upward, that would be the time to watch how this fund picks up. That would also be a good time for the fund to build itself a track record.
The fund is managed by Anand Radhakrishnan and Roshi Jain.