Investment Focus - Templeton India Growth Fund: Buy

After the 22 per cent drop in the Sensex so far this year, what stocks should you buy?

That's not an easy call today owing to the various global, macro-economic or regulatory risks surrounding most listed companies. Therefore, buying a diversified equity fund is a good way to acquire a basket of quality stocks at one shot.

With its stringent value focus, Templeton India Growth Fund (TIGF) appears to be a good option for investors willing to stay on for five-plus years. Here are the three key reasons why we recommend this fund:

Time to go for ‘value': Low PE (price-earnings multiple) stocks have been battered while expensive stocks have held on, during the recent market fall, owing to extreme risk aversion and a flight to quality on the part of investors. As a result, consumer stocks are trading at a huge premium to the market while infrastructure stocks have plunged to a discount.

Multinationals are trading at much higher valuations than domestic companies. Commodity companies are trading at big discounts to their replacement cost. This creates many pockets of opportunity for value investors looking to pick up stocks at a discount to their intrinsic value. With its contrarian sector and stock choices, TIGF's one-year returns have lagged the Sensex.

However, as stock markets revive over the next two years, the fund has potential to outperform. Value stocks usually tend to lead in the initial stages of a market rebound; beaten-down stocks and sectors delivered the maximum gains in the previous market rally from March 2009.

Track record: TIGF has managed a 17.5 per cent compounded annual return (as on September 29, 2011) in the 15-year period since its inception. That implies that Rs 10,000 invested in TIGF in September 1996 would have grown to Rs 1.17 lakh today. The same sum invested in the BSE Sensex would have grown to Rs 49,000. The fund has outperformed the Sensex over five- and three-year time frames too with compounded annual returns of 11 and 15 per cent respectively, against Sensex returns of 9 and 13 per cent.

Portfolio strategy: Selecting stocks mainly by traditional valuation parameters, TIGF picks up value stocks from across the market capitalisation range. The fund had over 40 per cent of its portfolio invested in stocks with a less than Rs 10,000 crore market cap as of August 2011.

Given the big discounts between mid- and large-cap stocks in today's market, that may pay off over the medium term. TIGF's focus on out of favour stocks is evident from the fact that banks (13.6 per cent), fertilisers (9.6 per cent), metals (8.4 per cent) and finance (7.8 per cent) were its top sector exposures in August 2011.

The average PE multiple of the stocks in its portfolio stood at just over 14 times, a sizeable discount to the Sensex PE multiple of 18.3 times. The fund is managed by Dr J. Mark Mobius.

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