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Franklin India Smaller Companies Fund: Impressive Small & Mid Cap Fund
Mon, Jun 27, 2016
Source : Khyati Shah, 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 by investing in mid and small cap companies. The fund was launched in January 2006 and is benchmarked against the Nifty Free Float Midcap 100 index. The fund has an AUM of Rs. 2,963 crore as on May 31, 2016 which has increased by Rs. 690 crore as compared to last year May 31, 2015 (Rs. 2,273 crore).

 

Performance:

The fund’s performance across different time horizons is extremely good as seen in the table given below. It has consistently beaten its benchmark as well as the equity diversified category average and has managed to be a top quartile fund across time horizons. Since inception its compounded annual growth rate is 3.03% higher than Nifty Free Float Midcap 100 index. The outperformance margin vis-à-vis its benchmark as well as equity diversified category is substantially high.

Scheme Name

YTD

6 Months

1 Year

3 Years

5 Years

Since Inception

Franklin India Smaller Companies Fund

3.66

4.98

7.85

35.43

23.79

14.73

Nifty Free Float Midcap 100 index

-0.78

0.33

0.85

19.32

10.5

11.7

Category Average

0.14

0.35

-0.62

20.34

13.33

NA

Rank

16/160

6/157

6/156

4/143

2/134

NA

Figures are in % as on May 31, 2016; Returns above 1-year in Compounded Annual Growth Rate (CAGR)

 

When we look at the calendar year returns it’s quite clear that this fund has beaten its category average and benchmark in each of the last four calendar years. The fund’s performance began to shine after 2011. In 2011, which was a turbulent year for the markets, it managed to outperform Nifty Free Float Midcap 100 index but underperformed the category average. The fund has been in top quartile of its peer-set in the years 2012, 2013, 2014 and 2015. In the year 2012, 2013 and 2014 the fund 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

2011

2012

2013

2014

2015

Franklin India Smaller Companies Fund

-25.91

51.7

13.22

89.92

9.56

Nifty Free Float Midcap 100 index

-31

39.16

-5.1

55.91

6.46

Category Average

-23.92

34.19

5.36

54.14

3.72

Rank

89/132

5/137

7/141

8/144

24/153

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

0.92

0.72

Category Median

0.95

0.9


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

0.17

0.13

Category Median

0.12

0.11

 

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

28.03

37.96

57.34

Category Median

36.76

50

70.95

 

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

18.32

24.08

35.78

Category Median

19.44

27.65

44.63

Sector & Company Concentration signifies that the funds maintain a fairly diversified portfolio.

Number of equity holdings: The fund currently holds 68 stocks in its portfolio (May 31, 2016), which is much higher than the median stock count for the diversified-equity category, which currently stands at 47. 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 54.

Cash allocation: Its cash allocation at the end of May 2016 was 8.81 per cent. The average cash allocation for last five years is 7.75 per cent. Its maximum allocation to cash over last two years was 10.08 per cent in April 2015 and lowest was 6.23 per cent in February 2016. In 2015 it had an average cash allocation of 9.08 per cent. Thus on the whole the fund maintains higher allocation to cash.

Portfolio Characteristics: The top 5 sectors in the portfolio had an allocation of 37.96% which is lower than the category average of. 48.66%. The top 5 sector include Bank – Private, Finance – NBFC, Bearings, Cable and Air Conditioners.

The fund’s exposure to cyclical stocks currently is 69% followed by Services with 14% and Defensives with 5%. The Top five holding are Equitas Holdings Ltd., Finolex Cables Ltd., Yes Bank Ltd., eClerx Services Ltd. and FAG Bearings India Ltd.

In the last six months the fund has bought stocks of Cera Sanitaryware Ltd., Equitas Holdings Ltd., Heidelberg Cement India Ltd., Deepak Nitrite Ltd. and Jyothy Laboratories Ltd.

Stocks of Orient Cement Ltd., Talwalkars Better Value Fitness Ltd., Pidilite Industries Ltd., Bharat Electronics Ltd., Deepak Fertilisers & Petrochemicals Corporation Ltd., Wabco India Ltd. and NRB Bearings Ltd. have been dropped from its portfolio.

The current allocation to large cap is 18%, mid cap is 64% and small cap allocation is 7%.

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 2.37% which lower than category median of 2.51%. 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:

Janakiraman Rengaraju is Vice President, portfolio management equity for Franklin Templeton India AMC Ltd. He has an experience of over 17 years. He is also responsible for providing research support on Telecom and Media sectors.Mr. Rengaraju manages Franklin India Flexi Cap, Franklin India Prima Fund, Franklin India Opportunities Fund and Franklin India Smaller Companies Fund. He is co-portfolio manager for Franklin India Prima Plus and Franklin India High Growth Companies Fund. 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 managed the investment corpus of Indian Syntans Group, a Chennai based privately held group of companies. Before this, he worked for UTI Securities, Mumbai. Mr. Rengaraju 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) charterholder.

Hari Shyamsunder:

Hari Shyamsunder is a Vice President and Senior Research Analyst for Franklin Templeton AMC (India) Pvt Ltd. He is responsible for providing research on the oil and gas, automobile and auto ancillaries industries. Prior to joining Franklin Templeton, Mr. Shyamsunder worked as a business analyst with BG Group PLC in Mumbai. Mr. Shyamsunder holds a post graduate diploma in management from Indian Institute of Management, Bangalore, and a bachelor of engineering from National Institute of Technology, Trichy. He is a Chartered Financial Analyst (CFA) charterholder.

View:

The fund has demonstrated an ability to consistently outperform and figure as a top quartile fund in most time periods. A strong fund management team well diversified portfolio, low expense ratio and low turnover in the portfolio positions it favourably as a choice for the midcap allocation in your portfolio.

 

To read the previous Citrus Analysis of Franklin India Smaller Companies Fund Click Here

 
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