Franklin India Equity Advantage Fund Reinvestment Inc Dist cum Cap Wdrl INF090I01197

The following text is from June 12, 2023.

The investment process continues to be research-intensive and largely relies on a bottom-up approach with top-down overlay. Venkatesh Sanjeevi prefers stocks that meet his quality and valuation requirements.

On the quality front, he runs hygiene checks on the company’s management quality, competency of the team, corporate governance issues, its track record of capital misallocation, and whether it can make long-term decisions. He would select companies with clean balance sheets, strong business models, and sustainable competitive strengths. To make the cut, the company must have a good runway for a profitable growth over the long term. He doesn’t like companies that can grow for two to three years and then plateau.

On the quantitative side, he prefers companies that can generate around 12%-13% return on capital over the cost of capital over a cycle. From a valuation perspective, he looks at metrics that are apt for a given company and sector, such as price/earnings, price/book, or price/enterprise value (for insurance companies) and cash-flow-based metrics.

He can be flexible with valuation in case he sees strong growth ahead, but the quality framework is more sacrosanct. The investment approach is thorough, and Sanjeevi has clarity in terms of how he would like to take the fund ahead. However, it’s just been over a year of him managing this fund and hence the efficacy of his thought process, investment approach, consistency in portfolio construction, and execution of the strategy must be evaluated over time. Therefore, we retain the Process Pillar at Average for now.

In line with the category’s investment mandate, Venkatesh Sanjeevi invests 35% of assets each in large- and mid-cap stocks. However, he is flexible with the balance of 30% and invests this portion across market segments, depending on where he sees better investment opportunity. This makes the execution and its timing important for the strategy to deliver.

While selecting mid- and small-cap stocks, the manager is cognizant of the liquidity risk and invests in stocks that are adequately liquid. There are a few guardrails as well. For instance, the exposure to a single mid-cap stock is largely maintained between 1.5% and 2.5% because the risk and volatility in mid-caps could be quite significant, particularly during an adverse environment.

Sanjeevi constructs a more broad-based portfolio with representations of stocks from across sectors. He therefore tweaked the portfolio to bring it in line with his thought process. For instance, the allocation in some of the utilities names was beyond his comfort level because he believes that it’s difficult to build a long-term consistent growth profile in it. Hence, he trimmed exposure there. Subsequently, he increased the exposure in consumer staples segment since several companies from this space meet his investment philosophy of growth, good quality management, robust balance sheets, and strong cash-flow-generating businesses. The idea is to invest in companies having a good runway for a profitable growth over the long term.