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Franklin India Smaller Companies Fund: Mid and Small cap Champion
Tue, Dec 15, 2015
Source : Jeni Shukla, Citrus Interactive

Franklin India Smaller Companies Fund is an open ended mid-cap equity diversified fund. The primary investment objective of the scheme is to generate long-term capital appreciation. The fund has defined smaller (mid and small cap) companies as the ones which have market capitalization below that of 100th stock in the CNX 500 index. The fund was launched on 13th January 2006.

It is benchmarked against the CNX Midcap index. The fund has an AUM of Rs. 2,568 crore as on October 31, 2015 which has increased by Rs. 1,132 crore as compared to last year October 31, 2014 (Rs. 1,436 crore).

 

Performance

The fund has performed exceptionally well across time periods (refer to the table below). It has consistently beaten its benchmark as well as the equity diversified category average and has managed to be a top quartile fund in across time horizons. Since inception its compounded annual growth rate is 2.68% higher than CNX Midcap.

Scheme Name

YTD

6 Months

1 Year

2 Years

5 Years

Since Inception

Franklin India Smaller Companies Fund

8.19

2.74

12.61

46.91

20.93

14.97

CNX Midcap

5.28

0.52

6.94

31.27

8.26

12.29

Category Average

3.31

-1.03

3.42

28.68

11.68

NA

Rank

24/158

26/161

19/158

10/148

5/136

NA

Figures are in % as on November 30, 2015; Returns above 1-year in Compounded Annual Growth Rate (CAGR)

 

When we look at the calendar year returns we find that fund’s performance began to shine after 2011. In 2010 it underperformed both the benchmark and the equity diversified category. In 2011, which was a turbulent year for the markets, it managed to outperform CNX Midcap but underperformed the category average. In each of the last three calendar years it has shown substantial amount of outperformance vis-à-vis the benchmark and the category – also maintaining its rank among the top 10 funds.

Scheme Name

2010

2011

2012

2013

2014

Franklin India Smaller Companies Fund

18.59

-25.91

51.7

13.22

89.92

CNX Midcap

19.16

-31

39.16

-5.1

55.91

Category Average

19.64

-23.95

34.05

5.43

53.99

Rank

74/131

92/138

5/142

7/146

8/149

All figures in %


Risk: In terms of measures of risk such as standard deviation and beta (measured over last three years), the fund has taken lower risk compared to the category median.

 

Standard Deviation

Beta

Franklin India Smaller Companies Fund

0.88

0.69

Category Median

0.95

0.89

 

Risk-adjusted Returns: In terms Treynor and Sharpe ratio (measured over last three years), the fund has provided much higher risk-adjusted returns than the category median.

Treynor

Sharpe

Franklin India Smaller Companies Fund

0.18

0.14

Category Median

0.08

0.08

 

Portfolio Characteristics:

Sector concentration: The fund’s concentration in the top 3, 5 and 10 sectors is much lower than the category median.

Top 3

Top 5

Top 10

Franklin India Smaller Companies Fund

27.5

35.84

52.47

Category Median

37.67

50.34

71.43


Company concentration: The fund’s concentration in the top 3, 5 and 10 companies in its portfolio is considerably lower than the category median.

Top 3

Top 5

Top 10

Franklin India Smaller Companies Fund

14.44

19.74

31.07

Category Median

19.38

27.75

45.19


Number of equity holdings: The fund currently holds 71 stocks in its portfolio (October 31, 2015), which is much higher than the median stock count for the diversified-equity category, which currently stands at 45. Thus, based on equity count the fund runs a diversified portfolio compared to its peer set. In the last five years the fund has always had a diversified portfolio with the number of equity holdings averaging 51.

Cash allocation: Its cash allocation at the end of October 2015 was 8 per cent. The average cash allocation for last five years is 8 per cent. Its maximum allocation to cash over last two years was 12 per cent in January 2014 and lowest was 6.7 per cent in March 2014. In 2015 it had an average cash allocation of 9 per cent. Thus on the whole the fund maintains higher allocation to cash.

The fund’s exposure to cyclical stocks currently is 70% followed by Services with 15% and Defensives with 5%. The Top five holding are Finolex Cables, eClerx Services, Yes Bank, FAG Bearings and Voltas.

In the last six months the fund has bought stocks of Lakshmi Machine Works, Century Plyboards, HT Media, Ahluwalia Contracts (India), Navkar Corporation, NRB Bearings and NIIT Technologies whereas it dropped Bajaj Corp. from its portfolio.

The Fund has a few large cap stocks such as HDFC Bank, Axis and Bharti Airtel but the cumulative exposure to these stocks is well below the permissible limit of 25% of the portfolio size.


Processes

The fund has defined smaller (mid and small cap) companies as the ones which have market capitalization below that of 100th stock in the CNX 500 index. The universe would also include those companies coming out with fresh issuance IPO and whose post issue market cap (based on issue price) would fall under above-mentioned criteria. It tries to identify high growth companies operating in small cap space that are likely to transform into tomorrow’s market leaders resulting in substantial capital appreciation over time. A minimum 75% of the portfolio is supposed be invested in smaller companies. This can go up to 100%. A maximum of 25% can be invested in debt and money market instruments. The fund follows a buy-and-hold approach.

The fund’s expense ratio is 2.47% which marginally higher than category median of 2.45%. Like most equity funds the fund has an exit load of 1 per cent on or before one year from the date of investment. Minimum investment in the fund is Rs 5,000.


Fund Manager

R. Janakiraman:

The fund is managed by R. Janakiraman who has an experience of over 17 years. He manages schemes like Franklin India Prima Plus, Franklin India Prima Fund, Franklin India Flexi Cap Fund, Franklin India High Growth Companies Fund and Franklin India Opportunities Fund. He is also responsible for providing research support on Telecom and Media sectors. Most of the funds managed by him have a strong track record. This shows that the fund manager has very sound stock picking skills. Prior to joining Franklin Templeton, he was managing the investment corpus of Indian Syntans Group, a Chennai based privately held group of companies. Before this, he worked for UTI Securities, Mumbai. He holds an M.B.A. from the Indian Institute of Management in Bangalore and a bachelor of engineering from the Government College of Technology in Coimbatore. He is a Chartered Financial Analyst (CFA) Charter holder.

Roshi Jain:

Roshi Jain is vice president, portfolio management equity with Franklin Templeton India AMC. Ms. Jain is the portfolio manager for Franklin India Flexi Cap, Franklin Build India Fund, Franklin India High Growth Companies Fund and Franklin Asia Equity Fund. She is also co-portfolio manager for Franklin India Prima Fund, Franklin India Smaller companies Fund. Ms. Jain has been in the investment Industry for the past 11 years. Prior to joining Franklin Templeton, she worked as Financial Analyst at Goldman Sachs, London. Ms. Jain earned her post graduate diploma in management from Indian Institute of Management, Ahmedabad in 2002. She earned her chartered accountancy from Institute of Chartered Accountants of India in 1998 with an All-India Rank 2. She is also a CFA charter holder from the CFA Institute, US.

 

Conclusion

The fund has delivered impressive top quartile performance over market cycles. A strong fund management team, well diversified portfolio and low turnover in the portfolio position it favorably as a choice for the small and midcap allocation in your portfolio. However, one needs to keep an eye on the size of the fund. It has already crossed an AUM size of Rs. 2,500 crore. A very large corpus may hinder its ability to manage small cap stocks.
 
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