Franklin India Flexi Cap - Volatile in short term, outperformer in the long term

Lahar Bhasin recommends Franklin India Flexi Cap as a holding in the portfolio of your long term investors. However, your investors needs to be cautioned about the possible volatility in the short term

Franklin India Flexi Cap is a diversified equity fund where the management strategy centers on a bottom-up approach to stock picking without a sector or market capitalisation bias. The portfolio is skewed to large caps which are allocated 75-80 per cent of assets while mid caps are usually in the 10-15 per cent range, followed by small caps where the exposure rarely crosses 10 per cent.

With the onset of a bear phase in 2008, the fund faced the litmus test for the first time in its tenure of six years. Assessing the fund’s performance across the ups and downs of the market, one finds that the fund managed to perform exceedingly well in its early years, curtailed losses in 2008 (51.6 per cent fall in NAV compared to 57 per cent loss registered by the benchmark, S&P CNX 500) and in the recovery phase of 2009, the fund again lived up to investor expectations. In fact, the lower exposure to the mid and small caps relative to its peers has not dented the fund’s rankings significantly. So far this year, losses have been contained when compared with the benchmark.

The fund management style is characterized by a focus on fundamentals of a stock, low churn in the portfolio and consistency in holdings. Contrary to the implication of ‘flexi cap’, the fund doesn’t move assets across the market cap spectrum. The 23 per cent exposure to banking stocks would point to a sector focused strategy.

However, the overall approach is to focus on the fundamentals of a stock rather than follow a sector focused strategy. As a result of this bottom up approach the fund is overweight on the media and entertainment segment and unlike many of its peers, it continues to invest a large 10 per cent of its portfolio in telecom services. For instance, the fund has dedicated 7-11 per cent of its assets to Bharti Airtel over the past 18 months. A moderate portfolio turnover ratio further points to an investment strategy based on fundamentals.

One can expect concentrated bets in the portfolio which add to the volatility in returns. Statistics reveal that over the shorter period of a year, the fund’s returns tend to be more volatile relative to other diversified equity funds. However, over the longer term of three- and five- years this relative volatility is far less. Furthermore, the level and consistency in exposure to top holdings reflects conviction in the stock picks.

Experienced Management

The fund manager, Sivasubramanian has been at the helm since the launch of the fund and has successfully managed funds such as Franklin India Bluechip for over a decade. Siva was joined by earlier this year by Vasudevan who has been with the fund house since 2007.

The short term volatility in returns is not severe and should not concern investors with a long investment horizon. For the time being portfolios which are concentrated in the banking space could avoid the fund while portfolios concentrated in the energy space would benefit from the diversification benefits that Franklin India Flexi Cap has to offer.