Portfolio review coverage on Franklin India Bluechip fund as of Aug-2013.

1. 21
Buddha
...Connecting the dots
Franklin India Bluechip Equity Fund- Portfolio Report
August 31, 2013
© Saurabh, Shared in investor’s interest
1

2. Table of contents
1
Market Narrative
2
Product Overview
3
Portfolio Snapshot
4
Investment Process
5
Performance Summary
6
Portfolio Analytics
7
Risk Tracker
8
Bottom-line
This product is suitable for investors who are seeking :
• Long term capital appreciation
• A fund that invests in Indian large cap stocks
High Risk*
(Brown)
•
•
•
*Risk indicators are colour coded as:
(Blue): Investors understand that the principal will be at low risk.
(Yellow): Investors understand that the principal will be at medium risk.
(Brown): Investors understand that the principal will be at high risk.
© Saurabh, Shared in investor’s interest
2

3. Market Narrative
Indian equities witnessed yet another volatile season in the month of August with benchmark
indices Sensex & Nifty losing 3.8% & 4.7% respectively on monthly basis. The principal driving
factors were depreciating INR and RBI’s reluctance to decrease interest rates. Q1 FY14 GDP
growth registered a record low of 4.4%. Even IIP growth went down to 0.6% level. Concerns
about slowing Indian economy, huge fiscal & current account deficit, high inflation and muted first
quarter results by Corporate India has further dampened mood for the institutional investors. On
the global front, Syrian crisis and the fears of liquidity tapering by US Fed escalated problems for
investors. FIIs pumped out INR 59 billion from Indian equity markets. All these factors have
created a major downward pressure on Indian rupee; it touched its all time low of 68/$ mark in
the month. The only reliefs were better than expected monsoons and FDI growth. Better
monsoons should help GOI in countering inflation from supply side.
Indian Equity Indices Performance
Index
S&P BSE Sensex India
Exhibit 1
Monthly Return YTD Return 1 Year Return 3 Years Return 5 Years Return 10 Years Return
(%)
(%)
(%)
(% Ann)
(% Ann)
(% Ann)
-3.75
-4.15
6.83
1.19
5.04
15.93
S&P BSE 200 India
-4.53
-10.58
2.07
-1.99
4.00
14.65
S&P BSE 500 India
-4.46
-11.97
0.63
-2.90
3.46
14.74
CNX Nifty
-4.71
-7.34
4.06
0.43
4.65
14.97
MSCI India Index
-3.08
-4.89
7.62
0.30
4.48
15.08
As of 31-Aug-2013
Monthly Sectoral Indices Performance
Exhibit 2
IT & Metals bucked the downward trend due to rupee depreciation whereas
Capital Goods and Realty turned out to be the worst monthly performers.
See Exhibit 2.
13.11
7.63
-9.93
Consumer Durables
BANKEX
-6.62
FMCG
-10.32
-8.44
-7.29
Power
-10.88
Realty
-1.19
-5.00
-3.47
Source: Bloomberg
Metal
IT
Healthcare
Auto
Oil & Gas
PSU
Capital Goods
-13.88
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3

4. Product Overview
Static Info
Asset class: Domestic Equities
Category: Large Cap
Structure: Open ended
Manager’s benchmark: S&P BSE Sensex
Inception Date: Dec 1, 1993
AUM: INR 46150 million
Total Expense Ratio: 2.16%
Fund Manager: Anand Radhakrishnan
& Anand Vasudevan
MORNINGSTAR Style Box ®
Equity Style
Size
Large
Mid
Small
Value
Style
Blend
Growth
AUM growth in the last five years
4,00,000
3,50,000
3,00,000
2,50,000
2,00,000
1,50,000
1,00,000
50,000
-
Exhibit 3
Q2 08 Q1 09 Q4 09 Q3 10 Q2 11 Q1 12 Q4 12
Franklin India Bluechip fund, an opened ended
equity scheme aims to generate superior
returns thru’ long term capital appreciation
from a diversified pool of large cap stocks. Its
benchmark is S&P BSE Sensex but as a truly
active fund its holdings goes beyond that 30
stocks investible universe. The fund manager,
Anand Radhakrishnan adopts a bottom-up
approach to Stock selection and commands
the freedom to choose stocks across various
sectors, themes and investment style.
This fund certainly belongs to the mainstream
equity participation products available in the
country. It boasts of a rich survival history of
twenty years in the market. As the name itself
suggests, it has a strong bias for large caps
and it also follows a disciplined diversification
approach.
Fund Manager, Anand Radhakrishnan is well
known in the investment circle for his knack
for stock picking. He puts rigorous quality
constraints for screening his target stocks,
often goes beyond the financial performance
indicators in the quest for alpha bias. He use a
mix of DCF and relative valuation principles in
his proprietory valuation models. He capitalizes
well on the irrational market behavior and has
never shied away from taking contrarian calls
against the broader consensus.
Over the years it has performed really well
against the benchmark. In the peer group
rankings it’s been very consistent with its 1st
quartile position. On the risk reward front as
well, it has delivered impressive results. All
these factors have translated into an excellent
response by the retail investors. This is
captured well in its AUM growth as shown in
Exhibit 3.
AAUM (in lakh INR)
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4

5. Portfolio Snapshot
Asset Breakdown
Exhibit 4
5.34%
0.02%
94.64%
Equity
Fixed Income
Cash & Cash equivalents
Sector Breakdown
Exhibit 5
Banks
Software
17.90%
Pharmaceuticals
21.42%
Telecom
4.75%
As of 31st Aug, 2013, almost 95% of the
assets have been invested in equities (as
shown in Exhibit 2). Amongst sectors, the
portfolio has highest exposure to Banks. Its
cyclical nature helps during market recovery
periods. The detailed sector breakdown has
been shown in Exhibit 5. At a Super sector
level, the Fund manager has tried to
optimize his diversification strategy into
Cyclical ~42% and Sensitive stocks
~40.5%. The top ten holdings list as shown
in Exhibit 7 truly reflects his strong bias for
out of favour blue chips. Stocks like Infy &
Airtel have been facing headwinds in the
market since last couple of years. He clearly
favors market leaders having excellent
management
teams,
solid
corporate
governance structure and cash positions.
50% of the assets have been invested in the
Top 10 holdings.
Petroleum Products
5.07%
Power
12.49%
5.74%
Cement
5.92%
8.43% 8.46%
Characteristics View
Auto
9.82%
Div Yield P/E P/CF P/B Current Ratio
1.85 12.40 8.23 1.80
1.31
Minerals/Mining
Others
Portfolio
Benchmark
Exhibit 6
MCap Breakdown
1.50%
Exhibit 7
1.67 15.87 12.05 2.54
1.39
Top Ten holdings
Infosys Ltd.
9.63%
8.73%
Bharti Airtel Ltd.
7.76%
ICICI Bank Ltd.
5.58%
Reliance Industries Ltd.
5.35%
Dr Reddy's Laboratries…
HDFC Bank Ltd.
88.87%
Large
Medium
Grasim Industries Ltd.
Small
4.97%
4.89%
3.92%
2.86%
IndusInd Bank Ltd.
Source: Franklintempletonindia.com
Cognizant Technology…
2.86%
NTPC Ltd.
2.83%
As of 31-Aug-2013
© Saurabh, Shared in investor’s interest
5

6. Investment Process
Their Investment Process has been built around the premise that superior risk adjusted returns
can be achieved over time by using a team-oriented, collaborative approach and disciplined,
bottom-up fundamental research.
Exhibit 8
Fundamental analysis
Underpriced, out of favour names
High quality names
Large Caps
Universal
screening
based on
marketcap filter
Identifies
growth
stocks with
wide
economic
moats
Initial due
diligence on
valuation and
risk
Detail
company
investigation
undertaken by
sector
analysts
Portfolio
construction,
maintenance
& oversight
on ongoing
basis
For this fund, Anand Radhakrishnan follows a bottom-up approach to portfolio management. The
whole framework has been divided into various stages. Anand and his team decides the coverage
universe on the basis of market capitalization. They retain large caps who are also market leaders
in their space. They also have a strong bias for brands which have high entry barriers, robust
business model, follows industry best practices and high corporate governance standards. As
mentioned earlier the manager often goes beyond the benchmark, S&P BSE Sensex for stock
picking ideas.
The analysts evaluate target companies on the valuation scale using both DCF & relative valuation
models. This is one of their most critical building blocks of their portfolio management process as
the fund house favours high conviction positions with low portfolio turnovers. The fund manager
is always looking to add positions on undervalued scrips. He is also not afraid to take contrarian
views on stocks which are facing momentary headwinds but fits nicely in his long term investment
criteria. His underweight positions in Auto and FMCG and overweight positions in Telecom &
Healthcare as against the peer group affirms those contrarian views . We will cover the impact in
the Analytics section.
They also have a rigorous on-going oversight process via which they churn out Performance
appraisal outcome for their investment strategies.
© Saurabh, Shared in investor’s interest
6

7. Performance Summary
This fund has had a stellar performance phase till last year. During that period, it not only delivered
superior returns over the benchmark but also managed a top quartile ranking in the large-cap peer
group.
7000
Wealth Creation over the years
Exhibit 9
6000
5557
5000
4482
4000
3000
2000
This reflects the compounding effects of long term out-performance.
1000
0
2003
2004
2005
2006
2007
Fund
Anand is known in the industry for his
bottom-up approach to stock selection.
His careful construction of the portfolio
and his strong preference for putting
quality filters in his target blue-chip stocks
has paid rich dividends. Its well reflected
in its relative performance history. It has
done remarkably well in all market cycles.
(See Exhibit 9 and the adjacent table).
However in the last one year, its
performance has taken a beating. The
fund has trailed Sensex in recent times
by huge margins (See adjacent table).
This divergent relative performance can
be primarily attributed to its high
exposure to Banking & Financial Services
sector. This has been explained in greater
detail in the next section.
2008
2009
2010
2011
2012
Benchmark
v/s Benchmark
Period
Fund Return
Benchmark Return Relative
1M
-4.62
-3.75
-0.90
3M
-10.09
-5.77
-4.58
6M
-8.19
-1.28
-7.00
YTD
-11.08
-4.15
-7.23
1Y
0.66
6.83
-5.78
3 Y (Ann)
0.74
1.19
-0.45
5 Y (Ann)
8.69
5.04
3.48
10 Y (Ann)
18.71
16.18
2.17
2008
-48.14
-52.45
9.05
2009
84.49
81.03
1.91
2010
22.96
17.43
4.71
2011
-18.25
-24.64
8.49
2012
26.79
25.70
0.87
© Saurabh, Shared in investor’s interest
As of 31-Aug-2013
7

8. Portfolio Analytics
Asset allocation and stock selection decisions
are taken by the fund managers. The
portfolio has a diversified focus in the
domestic large cap universe, currently it
holds about forty stocks which have been
well spread across various sectors.
1 Year Performance Attribution
Exhibit 10
Utilities
0.17
-1.36
0.02
0.49
Telecom
Materials
-0.3
-2.72
-1.47
IT
-0.27
0.49
0.08
Industrials
-0.61
Health Care
-2.07
Financials
1.15
-0.11
-1.34
Energy
Consumer Staples
0.04
3.25
-1.08
Consumer Discretionary
-0.14
Stock Selection -1.86
0.00
Asset Allocation -3.92
3 Years Performance Attribution
Exhibit 11
Utilities
Telecom
Materials
0.75
-2.98
0.87
-1.87
3.74
-5.21
-1.47
-0.33
IT
0.18
0.33
Industrials
-0.57
Health Care
Financials
-0.18
-0.58
Energy
Consumer Staples
Consumer Discretionary
2.59
4.13
0.68
4.59
-5.43
-0.69
Stock Selection 12.64
1.00
Asset Allocation -13.09
No. of monthly reporting periods: 120
Exhibit 12
On various timescales, the fund has beaten
the benchmark. Anand has been phenomenal
with his active stock picking skills. When it
comes to sectors we have seen him
accumulating huge positions in the Banking
space over the years. He has been fairly
overweight on the leading names from both
Private & Public sector banking side. This
strategy had been working well until FY12
given slight economic recovery post 2008 and
healthy asset quality. Though since last one
year the situation has become complex. The
markets have witnessed divergent business
performance by Private & Public sector
banks. Private players like Axis, ICICI & HDFC
bank have maintained high asset quality and
have reported rising NIM and a falling NPA
whereas all PSBs have seen fall in asset
quality and their bottom-lines have been
consistently
eroded
due
to
higher
provisioning for bad debts. All this has
created a big dent on portfolio’s last one year
performance. The fund underperformed
Sensex by whopping 5.78% in the last one
year.
Out of this, 2.18% came from
overweighting the Banking sector. The fund
has suffered similar blows from Cement &
Metals primarily due to lacklustre economic
environment.
He
has
derived
big
contributions from his bullish views on FMCG
and Telecom counters in the last one year.
See exhibit 10 & 11 for 1 & 3 years
Attribution results respectively. However
investors shouldn’t focus too much on
last year one year results.
Source: Bloomberg
Winning Period
Losing Period
In the last ten years, the fund has beaten
the benchmark
in 54% of all monthly
reporting periods while it also outperformed
in 70% of all YOY periods. See exhibit 12.
© Saurabh, Shared in investor’s interest
8

9. Risk Tracker
The portfolio management team lays a
strong emphasis on risk management. With
an eye on both long term and short term
Investment outlook they exercise tactical
shuffling of exposures between Cyclical,
Sensitive and Defensive sectors. This
strategy has worked really well during
market downturns. For instance in 2008 &
2011 though it posted negative returns but
it managed to beat the benchmark and the
category average by huge margins. In 2008
& 2011, it outperformed the benchmark by
9.05% & 8.49% respectively. See exhibit 9.
Volatility Comparison
Exhibit 13
50
45
40
35
30
25
20
15
10
5
0
2004 2005
2006 2007
2008 2009
2010 2011
2012 2013
Portfolio
On the volatility parameter, it has shown
less dispersion in performance compared to
the benchmark. See exhibit 13. Even the
monthly performance compiled using last
ten years data forms a normal distribution
curve. Having got more than 95% exposure
in large caps, the fund allays liquidity
concerns for the investors. In the peer
group, its best positioned on the risk &
return scatter chart. See exhibit 15. Its one
day *VaR to AUM ratio stands at 2.28% as
per Bloomberg data. The fund has done
reasonably well on several risk adjusted
performance meters as well. See the
below table.
Benchmark
Monthly Return Distribution
Exhibit 14
20
18
16
Frequency
14
12
10
8
6
4
2
0
Portfolio Returns
Note: *One day VaR has been computed
with 99% confidence level using Monte
Carlo simulation technique.
Risk v/s Return
Exhibit 15
3 Years Annualized Returns
1.40
Risk Adjusted Performance
1.20
1.00
0.80
0.60
0.40
0.20
0.00
0
2
4
6
3 Years Standard Deviation
Fund
Benchmark
8
Std Deviation
Mean
Sharpe Ratio
Information Ratio
Treynor Ratio
R-Squared
Beta
Alpha
Tracking Error
As of 31-Aug-2013
3 Years
16.01
0.16
-0.26
0.36
-6.74
96.93
0.82
0.13
5.03
5 Years
22.8
0.91
0.21
0.74
3.13
97.97
0.82
3.34
6.54
Source: Morningstar
Peer group
© Saurabh, Shared in investor’s interest
9

10. Bottom line
Franklin India Bluechip fund has been in existence since more
than twenty years now and holds an impeccable track record in
the Domestic Equity funds space. It is one of the flagship
products from Franklin Templeton India business. A thorough
historical analysis of this fund’s performance, analytics, style
and risk reflects two unique fundamental traits:
• The fund manager and his team has always been very
particular about the product’s investment focus. That’s one of
the primary reasons why the portfolio has a strong bias for
quality names in the industry and probably that’s also the
reason why we don’t see highly leveraged firms in his list.
• The fund manager has a high conviction on his proprietory
research models. That’s why he keeps a long term horizon with
the portfolio holdings. Though sometimes the team also
undertakes tactical decisions on asset allocation and stock
selection to check volatility in the short run.
Contact Us
21 Buddha Investors,
Whitefield, Marathahalli,
Indiranagar, Brigade road, JP
Nagar, Banerghatta road,
Hebbal, Sarjapur, BTM layout,
Electronic city
Still somewhere in Bangalore
+91-8374109195
Visit us at
http://in.linkedin.com/in/kaash
yapsaurabh
Under Anand’s stewardship we are fairly upbeat on this fund’s
future potential despite its poor run recently. The product has a
well diversified focus. It has done a phenomenal job of
compounding investor’s wealth with small downside deviation.
Even its expense ratio is lower than its category peers. Investors
with high risk appetite and a long term investment horizon can
consider this fund as a solid alpha generating tool in their core
portfolio.
Disclaimer & Confidentiality Note - Due diligence has been
exercised in checking the authenticity of all figures mentioned
in this report. But that does not guarantee its accuracy or
completeness. This portfolio review report has been compiled
with educational and awareness objective. It does not represent
any buy or sell recommendation from our research team.
Past performance is not necessarily indicative of future results.
Also always bear in mind that mutual fund investments are
subject to market risk, read all scheme related documents
carefully before investing.
21-Sep-2013 © 21 Buddha 2013
We value your opinions and
feedback. Your response will
have a significant impact on
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presentation improvement in
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to: kaashyap.saurabh@gmail.com
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