Brand Franklin Templeton took a severe dent after six of its debt funds were wound up last year. And the fund house’s equity schemes are having to face collateral damage as well. Many investors, distributors and financial advisors have started avoiding its equity schemes, fearing that the fund house may not survive the crisis. Prolonged underperformance of Franklin’s equity funds and the challenges it faced have not helped either. Vatsala Kamat spoke to Anand Radhakrishnan, managing director and chief investment officer-equity of the fund house in this back ground. Radhakrishnan assures investors on the prospects of the fund house and also dwells on the reason for the lacklustre showing of its equity funds, as well as the corrective steps being taken. Excerpts.
How has the debt fund debacle affected flows into Franklin Templeton India’s equity funds?
Shutting down the debt funds had a negative impact. True, most equity investors are not fixed income investors or debt investors and vice versa. But some advisors take a cautious view on the asset management company itself. So, we are still seeing net outflows. But it is very minimal and investors are starting to come back now. As money gets returned to the affected debt fund investors, the frustration will come down. There are still headwinds and a lot depends on how soon investors are repaid.
Several of your equity funds have underperformed their peers consistently over the past few years. Why is this so?
Our approach is slightly different. People tend to equate stable growth with high-quality business and, sometimes, cyclicals are looked at as poor-quality businesses. Investors would rather have 10-12 per cent stable growth for five years and don’t mind the huge valuations they have to pay for it. But they are wary of a company that might have varying growth rates due to economic cyclicality, but offer same kind of return over five years and available at cheap valuations.
Not all cyclical businesses are value destroyers. If you play the cycle well, they offer good return over the cost of capital and add lot of value to shareholders.
Between 2016 and 2019, a handful of stocks accounted for three-fourth of Nifty’s returns. Investors were willing to pay premium valuations for those companies. At the same time, many good companies were being penalized for being in the cyclical business. But we have seen what happened when the cycle turned. Tata Steel, for example, which was Rs 300 suddenly shot up to Rs 900. So, can it be that the company changed in one year?
Franklin India Bluechip Fund’s heavy exposure to banking and financial appears to be dragging performance.
Within banking and financials, there are three categories in my view. One set comprises of firms that have been stable over a decade such as HDFC Bank and Kotak Mahindra Bank.
Then, there is a set of beaten-down firms where we felt that management change was visibly bringing back credibility and was likely to bring better earnings growth such as ICICI Bank and Axis Bank.
With some of the smaller private banks included in our portfolio (e.g., Yes Bank), things did not go as expected. In hindsight, that was a regrettable decision.
Are equity investors justified in withdrawing money due to fears of the fund house itself being wound up?
Franklin Templeton’s commitment to India remains steadfast. Since 1995, India has been an integral part of Franklin Templeton’s global footprint. More than a quarter of our global workforce is based in India. So, India is not just an attractive investment destination, but a country that has contributed greatly to our success. It is the second largest emerging market with healthy growth and an educated middle-class.
We have no plans to exit our India business and we remain a local company with a global parent.
Did the underperformance and criticism lead to change in your portfolio strategy?
One of the key learnings is that quick and adequate course correction is needed, when there are lemons in your portfolio. This is important especially in a downtrend and when there is underperformance to peers and benchmarks. Our risk analysis suggests that holding on to businesses that are challenged and being tolerant for longer than necessary are key reasons for the underperformance.
Perhaps, we need to be more agile. We now have a stricter evaluation process. If a company or business goes through challenging times, we give it two to three quarters for making credible efforts to overcome those challenges and if that is not very convincing, then we are more open to altering our investment thesis.
Over the last one year, most of our funds’ performance have recovered significantly. This gives us confidence that we need not change our overall strategy. It is just that the market was skewed in a direction where we did not play. As the cycle and economic recovery play out, performance will get better.
Has the second COVID-19 wave delayed India’s economic recovery?
Yes, the second wave was unexpected and the magnitude is challenging compared to what we saw in other countries. And there is a shortage of vaccines.
But it is not an insurmountable challenge as it looked in April 2020. The economy is on a recovery path. Just after the nationwide lockdown last year, we had felt that the recovery would be broad-based and include traditional and cyclical sectors. These were ignored by the market, as the pre-COVID growth rate in gross domestic product (GDP) growth was only 4 per cent (December 2019) and limited to a narrow set of sectors.
The pandemic brought about a change in mindset of policy makers – with interest rate cuts, abundant liquidity, focus on manufacturing along with schemes such as the production-linked incentive (PLI) scheme. Our portfolio is positioned, therefore, to tap broader growth, not purely consumption, retail finance or technology. Companies have acted fast to cut costs as well and refocus their strategies.
Yes, there are some pockets of stress, but they would get resolved. Unless the government policies lose steam, we should get back, though there will be some delays.