The Hindu Business Line : Templeton India Equity Income Fund: Invest

Unitholders of Templeton India Equity Income Fund (TEIF) can retain their holdings. The fund's performance since its launch (at peak market levels in May 2006) has been impressive.

After taking an initial knock in performance, TEIF made a significant recovery and is among the top performers over a six-month basis. Its mandate to invest in overseas markets makes it an interesting option for investors seeking to diversify from the Indian market, given its rich valuation levels.

However, given TEIF's short track record and the fact that exposure to foreign stocks has been ramped up only recently, fresh exposures can be considered as a diversification option, rather than as a core holding.

Investment objective: Templeton Equity Income follows a value investing philosophy, where a stock is added based on its market price being at a discount to its intrinsic value. The fund does this by narrowing in on stocks with a high dividend yield (dividend as a percentage of market price), across Indian and overseas markets.

According to the offer document, up to 50 per cent of the assets can be invested in foreign stocks. In practice, however, the fund is likely to cap its foreign exposure at about 35 per cent as it needs to be 65 per cent invested in domestic stocks to qualify as an equity fund and enjoy dividend taxation benefits.

Suitability: The foreign equity component offers investors greater choice at a time when the Indian market is trading at a valuation premium. TEIF appears to be biased towards emerging markets, given its significant investing experience in such markets.

Such markets enjoy a risk profile and growth potential similar to the Indian market. Given the stretched valuations herein the Indian market, surplus liquidity could favour other emerging markets where stocks are available at cheaper valuations. Second, the value investing strategy has not paid off for most Indian funds in recent times, when money has actively chased growth stocks. There have also been fewer stocks with attractive dividend yields. In contrast, the yields offered by other markets are superior, as seen from some of the foreign stocks in the portfolio.

TEIF's performance has been significantly better than that of other value funds investing in the Indian market.

Performance: TEIF has delivered a return of 12.3 per cent over the past six months, beating its benchmark BSE-200, which returned about 6 per cent over the same period.

Since September, when the limits on overseas investments were defined and subsequently relaxed, the fund has steadily ramped up its foreign equity exposure to close to 30 per cent of assets as of February. The portfolio includes stocks from such countries as Korea and Taiwan to Turkey and Brazil.

The global diversification has also helped the fund have a representation from a wider range of sectors. In India, focus on dividend yield invariably leads to a bias towards sectors such as oil or banking.

However, TEIF's portfolio encompasses a wide range of sectors such as electronics (United Microelectronics Corporation, Taiwan), retailing (Edgars Consolidated Stores, South Africa) and construction. At 2-4 per cent dividend yields, these stocks appear to be better value picks than options in the Indian market.

Fund facts: TEIF has an asset base of Rs 1,749 crore. The fund is managed by Mr Mark Mobius, who also heads Templeton Emerging Markets Group, as well as Mr Chetan Sehgal and Mr Vikas Chiranwal.

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