FundsIndia Reviews: Franklin India High Growth Companies

Franklin India High Growth Companies (Franklin HG), an equity fund that invests across market capitalisations, was once among those that delivered outsized returns compared to peers and the market. In the last two years or so, this has been put to the test. Its 1-year return of 12% trails the Nifty 500 TRI index’s 15.6%. When looking at rolling 1-year returns in the past 3 years, the fund has beaten the index less than half the time. Franklin HG’s current 1-year return has it in the last quartile among diversified funds. So what gives? That is rooted in the fund’s strategy.

Long-term, high-conviction

Franklin HG is a more aggressive fund in the diversified or multi-cap space. It looks for sectors that can clock faster growth and identifies stocks on the same metric within these sectors. This does not translate into buying expensive stocks or an ignorance of valuations – the fund is in fact quite value-conscious. Second, the fund takes a long-term view of stock growth. It does not buy and exit stocks based on short-term market movements and opportunities. Its portfolio turnover is relatively low at 30-40%. Third, it takes concentrated or high exposure to such stocks. The top ten holdings of the fund have held above 55%. Individual stock holdings can be at 8-9%. Compared to its index, the fund’s sector weights too can be well above or much lower.

This aggressive, long-term stance means that the fund held on to some stocks that didn’t deliver. Consider State Bank of India, ICICI Bank, and Axis Bank all three of which were the fund’s top stock holdings in 2016 and 2017. The banks are addressing their bad loan issues, unlocking value in their subsidiaries, raising capital, and growing their loan books. However, these will pay off only over time and in the interim, they have been market underperformers for much of the past two years. Similarly, telecom stocks Bharti Airtel and Idea Cellular faced troubles over debt, costs, and competition, which reflected in their market performance. Tata Motors DVR was another portfolio drag.

However, the fund’s long-term stance has seen it hold on. This could well pay off over time; several of these stocks were in fact inching higher towards the end of 2017 and the fund narrowed the gap by which it trailed the category average and its peers. The ongoing correction, of course, halted this. Most of the banking sector stocks the fund holds do not have the concerns that are weighing on the continuity of public sector banks. They are also among the leaders in the corporate banking space and must gain when credit revival happens.

Similarly, while players like Bharti have been hit by disruptive strategies by a new entrant resulting consolidation in the space; it will likely leave fewer players like Bharti with a thriving market. But Franklin HG has been careful in its exposure in these troubled pockets. It has been pruning exposure to Idea Cellular and the stock is no longer in the top holdings.

Concentrated holdings in these stocks meant that they had a larger impact on the fund’s performance. This is the inherent risk in such focused investment strategies – a few calls turning sour can severely hurt performance. Franklin HG did have stocks that delivered; HDFC Bank remains a top portfolio weight and an outperformer. Whirlpool of India is another example. Smaller stock weights include HDFC, Somany Ceramics, Schaeffler India, Hexaware Technologies, SKF India, and so on. TVS Motor Company was an outperforming top holding that the fund gradually exited over 2017. However, the heavier weight that the few underperformers have played a bigger role in fund performance.

Above average

While 1-year and 3-year returns and near-term consistency are sub-par for Franklin HG, its longer term metrics still hold good. Rolling its 3-year returns over 5 years has it beating the Nifty 500 TRI 96% of the time. Considering 3-year rolling returns since its inception in July 2007, the fund has delivered losses less than 3% of the time. The Nifty 500 TRI has losses 5% of the time. On a 5-year basis, the fund has no period where it delivered losses even as the Nifty 500 TRI delivered losses 3% of the time.

The fund is, however, much more volatile than its peers. Its slackening performance over 2017 also hurt risk-return metrics such as the Sharpe ratio and the information ratio, which captures a fund’s ability to generate returns in excess of benchmark. Franklin HG is also much better at clocking outsized gains when markets rally than it is in containing losses when markets correct.

Franklin HG has in the past year upped holding extensively in energy stocks. Sectors such as construction and cement have also seen an uptick. The fund’s portfolio is geared more towards cyclical sectors than consumption-oriented themes. In fact, Franklin HG has pruned exposure to automobiles and consumer goods in the past year. Given this tilt and the fund’s current underperformers, it may see a pick-up in performance only over time and not in the near term. Its strategy also requires high risk and the ability to wait it out. Investors in the fund can continue to hold it.

The fund has an AUM of Rs 7,639 crore. Roshi Jain, Anand Radhakrishnan and Srikesh Nair are the fund’s managers.

FundsIndia’s Research team has, to the best of its ability, taken into account various factors – both quantitative measures and qualitative assessments, in an unbiased manner, while choosing the fund(s) mentioned above. However, they carry unknown risks and uncertainties linked to broad markets, as well as analysts’ expectations about future events. They should not, therefore, be the sole basis for investment decisions. To know how to read our weekly fund reviews, please click here.