Jun 22, 2016 01:27 PM IST | Source: CNBC-TV18

Diversified flexicap funds a huge draw: Morningstar

Sharing his views on Franklin India High Growth Companies Fund, Kaustubh Belapurkar says it has been a quality conscious stock picker. It looks for high quality stocks which record more growth than the industry average. It is making the most of India growth story.

Diversified flexicap funds are steadily becoming more prominent among investors, says Kaustubh Belapurkar, Director, Fund Research, Morningstar Investment Adviser. The funds are much more suited for hands-off investors who want to leave the decision of what market capitalisation stocks to get into. The fund managers take a call for them. 

ICICI Prudential Value Discovery Fund is one such fund. It focusses on companies with strong fundamentals which are trading at levels below their fair values, says Belapurkar. This strategy may not give good returns in a bull market but overtime across bull and bear market cycles, he says. 

Sharing his views on Franklin India High Growth Companies Fund, Kaustubh Belapurkar says it has been a quality conscious stock-picker. It looks for high quality stocks which record more growth than the industry average. It is making the most of India growth story.

The fund, says Belapurkar, has done very well especially in health care stocks and consumer cyclicals It is currently eyeing stocks like large private banks.

Below is the verbatim transcript of Kaustubh Belapurkar's interview with Anuj Singhal and Ekta Batra on CNBC-TV18.

Anuj: So what are we looking at today?

A: So what I want to speak about is actually diversified flexi cap funds. So we have spoken about a large and midcap fund category which is for investors who know what segment of the market they want to get into, but the flexi cap funds is probably for slightly more hands off investors who want to leave the job of deciding what market capitalisation stocks to get into to the fund manager and obviously there are some great managers to make that call for the investors, so that’s really the space I think a lot of investors are looking actively and you have some really good funds in this particular category.

Anuj: So let’s start with ICICI Pru Value Discovery Fund. What are the key highlights here and has it done well?

A: I think one thing very important to point out about this particular strategy is one of those differentiated strategy in the sense that we don’t have too many value based strategies in the Indian market. They are mostly growth oriented strategies, so that really standout for this particularly strategy where Mrinal who has been managing this fund for the last five years is a pretty good value stock picker.

They way he would go about thing is obviously he would use a typical value screen in terms of PE, price to book value, EV to EBITDA but then actually do a lot more deep diving into, understanding the fundamentals, what are the competitive advantages and actually pick fundamentally strong stocks, which are probably trading below their fair value and that’s he would go and build up his portfolio.

This short of strategy is probably good for investors which can gives you steady return across market cycles. It is not going to give you a blowout performance in a very bullish market, but when you look it across a bull and a bear market cycle, I think this fund has done exceptionally well; it’s outperformed the BSE500 by almost 10 percent over a 5 year period. So that’s a phenomenal return right there.

Ekta: What’s the strategy of Franklin India High Growth?

A: So Franklin is actually straddling the pure sort of growth strategy if I may say so. So, Roshi who has managing the fund and Franklin always been a very quality conscious stock picker, so essentially what they doing here is picking high quality stocks where they looking at exceptionally high growth as compare to the industry average. This is I must add slightly more concentrated portfolio if you look at typical mutual funds will hold in the range of about 50 stocks. This fund tends to hold about 35-40 stocks, so it is a more concentrated portfolio, so it is a more aggressively aligned portfolio. So this would be for investors who looking at sort of participating in India growth story and making the most of it in the years to come.

So again this fund has really done well. Their bets on some of the healthcare stocks, some of the technology stocks, some of the consumer cyclicals have really paid off well and we really see that being poise. If you look at it currently she is actually overweight on some of the banks and some of the telecom companies, your Bharti, Ideas of the world where she really taking some bets on. We are quite keen to see how this fund sort of will deliver over a long time period which should really play well for investors.

Anuj: Large private banks are really there in most of these funds?

A: That’s right.

Anuj: Even Reliance Equity Opportunities Fund and looks like most of them have more overweight on ICICI Bank, what explains that?

A: I think it obviously managers have sort of seen where the bank valuations really dropped to and fundamentally they still believe that it is a very strong proposition and that’s really were they are sort of adding on positions to not just ICICI Bank, but some of the other banks, so for instance you will see SBI appearing in some of these portfolios and in fact the top holding in couple of these. So that’s really where they are drawing, so obviously one is the valuation comfort and the other being that they seeing some sort of growth coming back into the economy and expecting that financials will be beneficiary of this play.

Ekta: And that would basically the rationale behind Larsen & Toubro and Tata Motors. Two out of three funds at least hold them?

A: That’s exactly. That’s again you are looking at consumer driven sort of economy picking up, your infrastructure spent picking up and that’s really where you would tend to add some of these positions.

Anuj: Any other fund that stands out or are these the main ones few of them that we discussed?

A: These were some of the more marquee funds. They are popular with investors and these have really the ones which have shone through, but yes there are others but these are the ones we really like.

Anuj: And they are still open for subscription.

A: Absolutely.

Anuj: Is there limit on how much money they can have because some of them have become quite large in terms of asset under management (AUM) especially the ICICI is already about Rs 12,500 crore under AUM?

A: I think what work well is because of it straddling both the mid and the large cap space, because the manager has the flexibility to he can move across capitalisation where he sees more value or more growth come in. I don’t see that as a constraint really in terms of, large caps are very well traded in the market, midcap are also not that bad off. There is no capacity constraint per se with some of these strategies. We don’t see any issue at all.
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