The Hindu Business Line : `Be choosy about the companies for the purpose of investment'

THERE is a good case for mid- and small-cap stocks, which may well form a critical part of an investor's portfolio, feels Mr Sivasubramanian K.N., Senior Portfolio Manager - Equity, Franklin Templeton.

The basis of selecting such stocks, a bit constrained as these are by such factors as limited research, should be clear nevertheless, he notes.

Excerpts:

Is it generally difficult to identify good small/medium companies? Aren't they somewhat under-researched?

Yes. However, you will have to remember that the universe of stocks in the mid- and small-cap segments in India is quite a large one. You need to be very choosy about the companies that are being selected for the purpose of investment.

As it happens typically, segments such as these are under-researched. I am referring to a phenomenon seen the world over. But it is safe to assume that investment in these companies, if you are wise enough to identify the opportunities at a sufficiently early stage, could provide you with substantial capital appreciation over time.

How do you intend to overcome these challenges?

Let me tell you about the extensive research database of smaller companies, which the investment team at Franklin Templeton has built over the past decade or so. This, I am sure, will come in as a handy tool while managing Franklin India Smaller Companies Fund, our latest offer.

FISCF, as you may know, is a five-year fund that aims at capital appreciation by investing in relatively smaller entities, with liquidity provided every six months.

The closed-end structure of the product will help us in effectively building positions in the companies that we like without being constrained by short-term flows and time.

A fund such as this should be preferred by those intending to participate in the potential growth of smaller companies.

What is the extent of Franklin Templeton's current investments in small- and mid-cap stocks?

Among our various equity funds, Franklin India Prima and Franklin India Prima Plus as well as the more recently introduced Franklin India Flexi Cap typically have exposure to smaller companies in varying degrees. All three funds have diversified portfolios. To give you some examples of recent investments, allow me to refer to our selection of Pricol and Essel Propack.

In which sectors are Franklin Templeton under-invested/over-invested at this moment?

Let me answer this in a different way. We believe that in a market like the one you currently have in India, stock picking assumes a more important dimension. That is to say, it becomes more important matter when compared to adopting a top-down approach or even taking sector bets.

We also believe that long-term investors are better off by adopting what is called a bottom-up approach and identifying companies that have good fundamentals across market cap ranges and sectors.

Hence, the sector exposures that we have built are a result of our individual holdings and not on the basis of any sectoral view.

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