A Fund to Ride in a Recovery
In our newsletter last week (click here to read it), we mentioned that we would identify funds that may be well-placed to ride an economic recovery.
While we may not be near a recovery soon, most experts accept that we may be at the fag end of a downturn – be it in economic growth, peaking interest rates or corporate earnings.
If that be the case, some of the smaller companies that were hit by the downturn, but still managed to keep themselves well afloat in tough years, may be amongst the best placed to use a recovery to pole vault their fortunes.
One such fund that takes adequate exposure to companies in the small and mid-cap space and has exposure to sectors that could sail fast in an upturn is Franklin India Smaller Companies Fund. With a return of 24% compounded annually in the last five years, the fund’s performance is a good 8 percentage points higher than its benchmark CNX Midcap and 5 percentage points higher than the mid-cap fund category’s average returns.
While this fund has had periods of slack performance, a marked pick up as a result of a strategy of taking contrarian bets has delivered results in the last 2 years, thus inspiring confidence.
Suitability
Franklin India Smaller Companies Fund is suitable only if you have a high risk appetite and if you are looking for some tactical exposure. As mentioned earlier, there could be no overnight recovery happening. Hence, exposure to this fund is best done through SIPs.
SIPs done over the next one year and then taking stock of performance, compared with peers before further exposure, may be a prudent approach.
Franklin India Smaller Companies takes exposure to stocks of companies that are much smaller compared with other regular mid-cap funds. Hence, the portfolio’s risk profile is much more enhanced than mid-cap funds such as IDFC Premier Equity or HDFC Mid-Cap Opportunities.
Performance
Franklin India Smaller Companies does not have a superior long track record, if measured on a risk-adjusted basis (sharpe ratio) over the last 3 years, especially when compared with top mid-cap performers. But the fund has reversed this performance in the last 2 years, generating returns superior to top quartile performers in the mid and small-cap space.
In the last 3 years, the fund beat its benchmark 94% of the times on a rolling one-year return basis (taken every single day in the 3-year period). While that is noteworthy performance, mid-cap funds such as Religare Invesco Mid N Small Cap have managed to beat the same benchmark 100% of the times, showing better consistency. But then, it is only expected of a much smaller-cap focused fund like Franklin India Smaller Companies to underperform its slightly larger-cap benchmark in prolonged downturns.
Portfolio
Franklin India Smaller Companies’ portfolio has stocks with an average market-cap of about Rs 3,700 crore. That’s less than the Rs 5,000-6,000 crore market cap average of most mid-cap focused fund portfolios.
This, together with the fact that the fund has exposure to sectors/stocks that are not at present held by too many funds, are key reasons for our choice of this fund; among the few we would like to pick, as one to ride the economic recovery.
If you thought sectors such as industrial products or capital goods were down and out, Franklin India Smaller Companies’ portfolio would prove otherwise. Stocks such as Finolex Cables, Supreme Industries and AIA Engineering were some of the dark horse picks that worked well for the fund in the past year.
Similarly, chemical plays such as Pidilite Industries or pesticide bets like PI Industries were all well timed picks. The fund’s top sectors of industrial products and, chemicals, besides the usual cyclical banking sector and auto ancillaries could benefit more when the economy moves decisively upward.
The contrarian bets are though sufficiently balanced with defensives by way of exposure to pharma and IT stocks. Individual stock exposure is capped at less than 5% to avoid getting stuck in small stocks. Also, a portfolio turnover of less than 30% implies that the fund goes with a buy-and-hold strategy for a good part; a strategy essential to building wealth with mid- and small-cap stocks.
The fund is managed by R Janakiraman and K N Sivasubramanian.
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why take undue risks when other funds with less risk give us the same return?
🙂 hello Sivasankaran, The call is given because we expect it to deliver higher returns going by its portfolio potential.Otherwise, as you said, one may be better off with diversified funds. thanks, vidya
how does this compare with DSP blackrock microcap fund?
Hello Satheesh, DSPBR Microcap invests in much smaller stocks and has an avg. mkt. cap of less than 2000 crore, hence much more risky. But on a risk adjusted basis, Franklin Smaller cos. scores in the last 2 years. thanks, Vidya
Hello Vidya, How do you rate Franklin Smaller companies fund vis-a-vis Franklin Prima Fund, yet another mid/ small cap fund from the same fund house? Prima fund also seems to be waking up after a period of hibernation. Given its long history of existence and recent revival in performance , do you consider Prima to be a mid/small cap fund worthy of investment?
Hello Sir, Franklin Smaller cos. invests in much smaller market cap stocks compared with Prima and the former is therefore more aggressive. Yes. Franklin India Prima is on a revival mode. We have a call on the fund: https://blog.fundsindia.com/blog/mutual-funds/fundsindia-recommends-franklin-india-prima/3966
Hello Vidya, How do you rate Franklin Smaller companies fund vis-a-vis Franklin Prima Fund, yet another mid/ small cap fund from the same fund house? Prima fund also seems to be waking up after a period of hibernation. Given its long history of existence and recent revival in performance , do you consider Prima to be a mid/small cap fund worthy of investment?
Hello Sir, Franklin Smaller cos. invests in much smaller market cap stocks compared with Prima and the former is therefore more aggressive. Yes. Franklin India Prima is on a revival mode. We have a call on the fund: https://blog.fundsindia.com/blog/mutual-funds/fundsindia-recommends-franklin-india-prima/3966
Dear Vidya Madam,
I appreciate your recommendations.
What is your view on DSPBR Small and Midcap Fund and IPRU Discovery as compared to FI Smaller cos?
Hello Ashok, DSP BR Small and Midcap is a more volatile fund but is comparable to Smaller Cos. However,Smaller cos. invests in stocks with much smaller market cap compared with DSP BR. Discovery is a value fund and is less volatile and can go through periods of underperformance in prolonged rallies. Vidya
Hi Vidya,
Franklin India Smaller companies was indeed a top recommendation from Funds India going by it’s returns as of today. It was an early pick from FundsIndia and I can only wish I had some exposure in this fund in the last 6-8 months. Nevertheless, I am planning to start investing in this fund from a 3-5 years perspective.
Only when you miss the bus you realize the importance.. typical retail investors… Buy High and Sell Low 🙂
Thanks,
Hi Vidya,
I want to start SIP in Franklin smaller coms equity fund.I already have account in fundsindia.Please suggest me.
Hello Santosh, Franklin India smaller cos. is a high risk high return fund, If you are willing to take short-term falls in the fund and hold for at least 5 years you may go for it.
As a FundsIndia investor, in future, kindly use the help tab in your FundsIndia account and use the advisor appointment feature. This will help our advisors establish a process of answering your queries on time and also check your current portfolio and so on. The blog may pl. be used as a general discussion forum. thanks, Vidya
Hi, vidya,
Is this right time to invest in franklin smaller co. Or you can suggest any other mid cap fund.
Hello Ranita,
Sorry I missed this comment earlier; hence the delay. Small cap funds are risky at this point in time especially for lump sum investment. Thanks, Vidya
Hi, vidya,
Is this right time to invest in franklin smaller co. Or you can suggest any other mid cap fund.
Hello Ranita,
Sorry I missed this comment earlier; hence the delay. Small cap funds are risky at this point in time especially for lump sum investment. Thanks, Vidya
Hi Vidhya,
Thanks for great analysis.
Please suggest me can I invest 5k through SIP?
I am looking for the good returns in an year or two.
Please suggest.
Thank you
Hello sir 1-2 year time frames are not good for equity. Please come in with a 5-year view. Thanks, Vidya
Hi Vidhya,
Thanks for great analysis.
Please suggest me can I invest 5k through SIP?
I am looking for the good returns in an year or two.
Please suggest.
Thank you
Hello sir 1-2 year time frames are not good for equity. Please come in with a 5-year view. Thanks, Vidya
Dear Vidya Madam,
I appreciate your recommendations.
What is your view on DSPBR Small and Midcap Fund and IPRU Discovery as compared to FI Smaller cos?
Hello Ashok, DSP BR Small and Midcap is a more volatile fund but is comparable to Smaller Cos. However,Smaller cos. invests in stocks with much smaller market cap compared with DSP BR. Discovery is a value fund and is less volatile and can go through periods of underperformance in prolonged rallies. Vidya
how does this compare with DSP blackrock microcap fund?
Hello Satheesh, DSPBR Microcap invests in much smaller stocks and has an avg. mkt. cap of less than 2000 crore, hence much more risky. But on a risk adjusted basis, Franklin Smaller cos. scores in the last 2 years. thanks, Vidya
Hi Vidya,
I want to start SIP in Franklin smaller coms equity fund.I already have account in fundsindia.Please suggest me.
Hello Santosh, Franklin India smaller cos. is a high risk high return fund, If you are willing to take short-term falls in the fund and hold for at least 5 years you may go for it.
As a FundsIndia investor, in future, kindly use the help tab in your FundsIndia account and use the advisor appointment feature. This will help our advisors establish a process of answering your queries on time and also check your current portfolio and so on. The blog may pl. be used as a general discussion forum. thanks, Vidya
Hi Vidya,
Franklin India Smaller companies was indeed a top recommendation from Funds India going by it’s returns as of today. It was an early pick from FundsIndia and I can only wish I had some exposure in this fund in the last 6-8 months. Nevertheless, I am planning to start investing in this fund from a 3-5 years perspective.
Only when you miss the bus you realize the importance.. typical retail investors… Buy High and Sell Low 🙂
Thanks,
why take undue risks when other funds with less risk give us the same return?
🙂 hello Sivasankaran, The call is given because we expect it to deliver higher returns going by its portfolio potential.Otherwise, as you said, one may be better off with diversified funds. thanks, vidya