Franklin India Flexi Cap Fund Direct Payout Inc Dist cum Cap Wdrl INF090I01FL1

The investment process continues to be research-intensive in nature. Managers and analysts jointly draw up the investment universe. Analysts gauge companies using discounted cash flow models and parameters such as return on equity, price/ book value, and P/ E. Sector-based model portfolios created by analysts are compiled by the research head to create market-cap-based model portfolios that serve as guides to the portfolio managers. For this fund, the multi-cap model portfolio is the starting point for the manager and becomes the basis for portfolio construction. R. Janakiraman seeks companies with clean balance sheets and steady businesses with sustainable competitive advantages that can generate healthy ROEs and returns on capital employed. A rather contrarian streak is also perceptible in the manager’s stock picks.

Janakiraman will pare/exit positions he believes are expensive. That said, the strategy is not without risks. A valuation-conscious approach and the manager’s inability to play momentum will hold the fund back during speculative or bull markets. The fund had struggled in the past because of a few investment calls that would have been best avoided. However, the process has been sharpened since then to reduce the number of such instances. Measures have been taken to hone the security-selection criteria to avoid investment mistakes. Although the investment strategy is tagged with inherent biases along with higher volatility, the investment team is adept at running such an investment approach.

The strategy is not centered around the manager but follows a well-defined structure backed by a proven research framework. Also, we have conviction on Janakiraman’s execution capabilities as a manager. Although he has not managed a predominantly large-cap fund before, he has over 15 years of fund management experience and has been an astute stock-picker in mid- and small-cap funds. Additionally, he has the requisite support and backing from an experienced research team, which combined should make this strategy work. Therefore, we reaffirm the Above Average rating for the Process Pillar.

The fund’s portfolio largely remains stable in terms of the allocation, nature, style, and diversification. Both large- and mid/small-cap stocks form part of the portfolio, with over 70% allocation to large caps. While constructing the portfolio, R. Janakiraman selects stocks using a bottom-up approach with a top-down overlay. This, coupled with his penchant for contrarian bets, often results in a portfolio that is unlike typical peers. That said, the investment team has now put up certain guardrails after reflecting on its funds' significant underperformance in 2018 and 2019 versus the benchmark, caused by not owning certain index heavyweights. Therefore, now if a stock has a greater than 5% weighting in the benchmark, then the fund manager cannot have zero weight in it, unless there is an overwhelming governance issue. However, the weight in those stocks will be based on the manager’s conviction level.

Broadly, the portfolio continues to be positioned to benefit from a pickup in consumption and economic turnaround. Over the last one year, while the exposure in financials has worked for the fund, some of the consumption exposure had hurt the portfolio recently because of the slowdown in the underlying demand environment and cost pressure caused by the inflationary impact. Also, the portfolio is not too defensive versus some of the peers and the benchmark. Still, it continues to lean toward cyclical growth recovery. Hence, the fund has exposure in companies from financial services, consumer cyclicals, and industrial sectors that can deliver better earnings growth.