Franklin India Prima Fund Direct Rnvstmnt of Inc Dist cum Cap Wdrl INF090I01FJ5

The coverage list for small/ mid-caps is built by the portfolio managers in conjunction with the analysts. When selecting companies, the investment team places strong emphasis on qualitative aspects such as managerial strengths and corporate governance; also, rigorous business analysis is performed to understand the growth prospects of the industry, its competitive landscape, entry barriers, and scalability prospects.

R. Janakiraman selects companies that can generate consistent and sustainable earnings growth over a business cycle and have low leverage and reasonably high returns on equity. He is aware that it is difficult to forecast earnings in small/mid-caps, hence, he uses historical five-year data as a yardstick to project five years ahead. He is not very rigid on valuations, so long as the company fulfills his investment criteria.

That said, the strategy is not without risks. The valuation-conscious approach and manager’s inability to play momentum will hold the fund back during speculative or bull markets, as has been the case in 2020 and 2021. The fund also struggled because of a few investment calls that could 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 strategy has the potential to deliver superior performance over the long haul, it is tagged with inherent biases along with higher volatility. Hence, we reassign Above Average rating to the process.

R. Janakiraman has made few modifications with respect to portfolio construction in the last few years. For instance, his benchmark-agnostic approach has often resulted in increased benchmark risk in the portfolio, which in turn has led to enhanced volatility in its performance pattern over the years. Taking a note of the same, gradually, the manager has bought in an element of benchmark alignment into the strategy with respect to sector weights. This is to bring down the benchmark risk in the portfolio. He is also now more open to investing in growth names provided they offer significantly higher growth prospects. Additionally, exposure to large-cap stocks is now maintained closer to the peer average. Relatively higher exposure in large caps compared with peers during the sharp rally in mid- and small-cap segments hurt the fund in the past.

Besides these, Janakiraman continues to invest 70%-80% of assets in mid/small-cap stocks. He invests in large-cap stocks primarily in sectors where he is unlikely to find good quality mid-caps. He also invests in beaten-down stocks or out-of-favor growth companies, especially when it is impacted by external factors rather than deteriorating fundamentals. He uses both top-down and bottom-up approaches while investing, with the latter being more prominent. He continues to avoid investing in companies that have excessive leverage in their books. From the portfolio perspective, the manager has higher exposure to the financial-services sector driven by a relatively favorable macro-cycle in the Indian economy. He has also been focusing on real estate, industrials, and few niche segments of IT such as engineering R&D and product companies.