Franklin India Focused Equity: Holds its ground in choppy markets

Only a few mutual fund schemes have managed to keep their heads above water in the volatile market conditions over the past year. Among these is Franklin India Focused Equity (earlier known as Franklin India High Growth Companies), with a positive one-year return of about 4 per cent.

This is much better than the 1.5 per cent return of its benchmark Nifty 500 TRI and the negative 3 per cent average return of its multi-cap category.

Impressive record

While a year is too short a period to assess performance, the fund’s long-term record is also impressive. Its annualised returns of 18-19 per cent over five and 10 years is 4-5 percentage points ahead of the benchmark, and places it in the top quartile in its category.

This smart performance is due to a few factors. One, the fund puts to good use its flexibility as a multi-cap fund to take significant exposure to more rewarding smaller stocks when the going is good, and switches allocations across market-caps depending on market conditions.

For instance, exposure to mid- and small-cap stocks has moderated from about a third of the fund’s portfolio a couple of years ago to about a quarter of the portfolio now. The chunk of the portfolio (about 60 per cent now) is in domestic large-cap stocks, and the fund also has some exposure (about 4 per cent of the portfolio) in the US-listed Cognizant Technology.

The scheme also increases its safety quotient in rough markets. Over the past year, it has moderated its equity exposure and upped cash and debt to about 9 per cent of the portfolio now from 5 per cent a year back.

Next, the fund’s focus on a compact set (a maximum of 30 stocks now as per SEBI mandate) of high-quality, high-growth companies has stood it in good stead. Over the past five years, stocks such as Petronet LNG, ITD Cementation and KEI Industries have delivered handsomely.

The fund blends its growth-investing strategy with a value approach, as seen in exits from stocks such as Whirlpool of India and Maruti Suzuki and over the past 1-3 years.

The fund sometimes also takes contrarian bets such as buying banking stocks affected by news of bad debt (SBI, ICICI Bank, Axis Bank); this has paid off over the past year.

The scheme’s investment in the beaten-down SpiceJet stock last September has also delivered well. A lower-than-category-average expense ratio aided by a small portfolio and low turnover also adds to investor returns.

Investors can consider buying the fund through the SIP route. But they should have a long-term horizon, some stomach for risk and be prepared for volatility along the way — given the fund’s exposure to riskier smaller stocks, its contrarian bets and some concentrated stock exposures. SBI and ICICI Bank each account for about 10 per cent of the portfolio now.