The Hindu Business Line : `Mid-caps continue to be viable'

He has been around for 10 years now. The funds that he manages are among the top performing ones across various time periods. Importantly, these funds are also among the largest in the business. Meet Mr K. N. Sivasubramanian, star fund manager of Franklin India Bluechip and Franklin India Prima. Business Line spoke to him on the trends in the Indian stock markets as well as issues specific to the funds of Franklin Templeton.

Excerpts from the interview:

Analysis of financial performance and valuations suggest that Indian companies may have to do better than what they done in the past for stocks to deliver attractive returns from their present price levels. What is your take on the issue?

We believe that corporate India is benefiting from a confluence of structural and cyclical factors. Going ahead, we expect further improvements in quality of management and relative competitiveness over global peers, which will help sustain the current trend and help valuations over the long term.

However, one should not expect corporate India to turn in the same level of performance in FY 05 due to the higher base of FY 04.

Over the long term, the changing demographic profile of India and the expected improvement in income levels will also lead to an explosion in demand for a range of goods and services. This is expected to benefit a wide swathe of companies in all sectors of the economy.

For long, many have suggested that only a few among the mid-caps will survive and emerge as large-cap stocks. Incidentally, mid-cap stocks have been drubbed since the beginning of the year. Do you think mid-cap stocks as a class will under perform large-caps?

The correction in the mid cap stocks was inevitable after the sharp run-up they had witnessed during 2003. One needs to keep in mind that on a bottom-up basis, there are quite a few companies across sectors with good fundamentals that have long-term potential. Moreover, given that this segment tends to be under researched, it means that chances of finding good investment opportunities before the market does are higher.

Mid-caps continue to be viable, as on a broad basis they have shown a consistent improvement in fundamentals and are reporting a faster improvement in their earnings. Increasingly, they are also giving higher dividend payouts. On the whole, the improvement in balance sheets, lower interest burdens and rising cash flows are an important positive trend for these companies

Inflows into equity funds always seem to come in at market peaks, instead of when they are at their lows. As a fund manager, what do you do, when you get fresh inflows at a time when you perceive valuations to be stretched?

In the last few years, we have seen a shift in this trend wherein more number of investors were coming into equity funds during downturns. Our investment style does not change due to the prevailing conditions, as we believe that one can find investment opportunities regardless of market conditions through rigorous research and analysis. In any case, if one looks at the market from a long-term perspective it does not matter the time at which the investment is made; it is the time given for the investments that matters.

What is your opinion about investing in overseas mutual funds? What do you think about their risk and return profile?

We believe that this avenue gives an investor the opportunity to achieve geographical diversification. However, investor's need to sit with their financial advisors to determine which fund to invest in, based on their risk profile and investment objective and a careful analysis of the particular scheme's performance track record and investment style.

Coming to schemes from your stable, is the FT Lifecycle fund of funds a better proposition than FT India Asset Allocation fund?

This would depend on the individual investor's investment objective, as to whether they would like to take exposure to equity and debt instruments or invest in a combination of schemes.

However, given that our Fund of Funds (FOF) products invest in schemes with an established track record, investors might be more comfortable with such a product.

Are there any other mergers of equity schemes in the offing?

Our product rationalisation exercise got underway earlier this year. The objective of this exercise is to eliminate duplication of schemes that had occurred with our Pioneer acquisition in 2002. In addition, we are looking to reposition / merge schemes that do not have a long-term sustainable proposition from our investors' perspective.

The other schemes that are being considered for consolidation include the liquid, balanced, asset allocation and government securities schemes. We expect the product rationalisation process to be completed in the forthcoming quarter.

Both the Bluechip and Prima Fund have multiplied in size over the past six months. Larger funds may require you select a larger number of stocks to diversify your portfolio; they may also come with higher impact costs. What changes have you made in your investment strategy/style for these funds in order to continue outperforming the indices?

There has been no significant change to our investment strategy during this period. We continue to dig deeper in terms of analysis and research to identify those companies across sectors that have the potential to take advantage of the cyclical and structural changes taking place in the Indian economy.

We believe that a diversified portfolio of such stocks with strong fundamentals will perform well across market cycles notwithstanding short-term developments that might affect "sentiment".

In terms of your personal investments, what is the asset allocation you follow? Do you invest in mutual funds?

Majority of my investments are in equities and these are in equity mutual funds.

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