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Mutual Fund Review: Templeton India Growth Fund

 

 

Templeton India Growth Fund (TIGF) is the first scheme from the house of Franklin Templeton Investments in India (launched in September 1996) and is currently managed by Dr Mark Mobius. TIGF is a diversified equity fund with assets under management of Rs 608 crore as of May 2010. The fund is part of the CRISIL~CPR under the diversified category and has been ranked CRISIL~CPR 1 in the last two quarters. Over the past five quarters, it was top ranked in three and CRISIL~CPR 2 in the remaining quarters. The CRISIL~CPR 1 rank indicates that it is within the top 10 per cent of its peer category owing to a combination of superior performance and good portfolio management.

Investment style TIGF follows a "Value Style" of investing. A value fund invests in stocks that are underpriced according to fundamental measures. Assuming that a company's share will not remain undervalued indefinitely, the fund acquires the shares before the expected upturn. Value funds tend to focus on safety rather than growth, and often opt for stocks that are likely to provide both dividends and capital appreciation. They invest in companies with low price-earnings (P/E) ratios as well as in stocks that have fallen out of favour with mainstream investors owing to factors like changing preferences, poor quarterly earnings, or downturns in a particular industry.

Value funds discover and invest in undervalued stocks, and hold on until the market recognises the stocks' intrinsic values. The focus is to invest in securities with potential for long term growth rather than high-performing securities according to the current market trends.

The value investing principle was established by Benjamin Graham and David Dodd, both professors at Columbia Business School in the early 1930s. The most high-profile proponent of value investing is Warren Buffett, chairman, Berkshire Hathaway.

The fund's value style of investment is evident from the fact that it demonstrates low level of churning in the portfolio. The fund does not rely on active cash calls and generally remains fully invested. For instance, for most of 2008 when equity markets were volatile, the fund had on an average 95 per cent of assets in equities and equivalent. In the May 2010 portfolio, the fund had close to 25 per cent of its stocks which have been held for over 5 years. The average holding period of stocks in the latest portfolio is almost 3 years.

Good performance TIGF's performance on risk-adjusted return relative to its peers is high and is one of the key factors for propelling its performance to CRISIL~CPR 1. The scheme has managed to consistently provide positive alpha over longer time frames through value investing. The scheme has adequately rewarded its long-term investors with 20 per cent CAGR returns since inception (almost 14 years) vis-à-vis close to 13 per cent CAGR returns by the benchmark index (BSE Sensex). An investment of Rs 1,000 in the scheme at the inception has appreciated 13 times to Rs 12,700 vis-à-vis Rs 5,102 in the benchmark index.

In the five-year and 10-year time frames, too, the fund has outperformed the Sensex having delivered 24 per cent and 23 per cent, vis-à-vis the Sensex's 20 per cent and 14 per cent, respectively.

Even in the last 1-2 years, the fund benefited from the broad based rally in stock prices owing to its ability to pick value stocks during the market downtrend. Over the past 2 years, the fund gave 22 per cent CAGR returns compared to 15 per cent by the benchmark index. The fund though has underperformed its benchmark index in shorter periods (1-month and 3-month). However, it is important to note that equity funds must always be looked at from a long term perspective.

Well diversified The fund maintains an optimally diversified portfolio across market capitalisations with a slight bias towards large-cap stocks. The allocation to large-cap stocks has, however, reduced considerably over the past two years from around 60 per cent during the peak of early 2008 to 35 per cent following recovery in the stock market. The fund has maintained investments in around 30 stocks across 20 sectors over along period of time to avoid the risk of over diversification.

Over the last 3 years, banks, refineries and investment companies account for around 28 per cent of its portfolio reflecting the fund manager's view on the long-term potential of these sectors.

 


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