Many equity funds have benefitted from the 2014 rally in the local indices, but are the markets headed for a setback amid the reform euphoria?
A few asset managers such as Matthews Asia believe Indian markets are vulnerable to disappointment, as implementing reforms is not an easy task in the country.
Recently, Amundi Asset Management said there could be short-term corrections in market, but the fund house is upbeat about the 12-18 month view.
Recent news has raised expectations. India’s central bank yesterday announced a surprise rate cut and investors are now looking for further positive signals from the union budget statement, which is coming in February.
Against this background, this week’s Head-to-Head puts Franklin India Fund and Goldman Sachs India Equity Portfolio against each other.
Both the Luxembourg-domiciled vehicles follow a bottom-up stock picking approach.
The Franklin India Fund, which was launched in October 2005, had assets worth $3.1bn on 30 November. Launched in March 2008, the Goldman fund had assets under management worth $833m as on 31 December.
Luke Ng, vice president of FE, provides a comparative analysis of the funds.
Investment strategy review
Both funds primarily adopt a bottom-up approach for stock picking and favor quality companies with good sustainable growth prospects, even if they are trading in higher multiples.
Currently, valuations of the underlying holdings of both funds are higher than their relevant benchmarks, observed Ng.
The performance benchmark index for both the funds differ, with the Franklin fund measuring its performance against the MSCI India Index consisting of 64 large- and mid-cap companies.
On the other hand, the Goldman fund uses MSCI India IMI Index as its relevant benchmark, which has a broader coverage in Indian equities covering stocks of all market capitalisation. Currently, there are 243 index constituents in the MSCI India IMI Index.
“Given the differences, Franklin India naturally has a strong bias toward large-cap stocks than the Goldman fund.”
Currently, nearly 80% of the Franklin fund holdings are in large-cap companies, whereas the Goldman fund has about 60% weighting in the large-cap companies.
“Worth to note, Goldman seems to see more opportunities in the small and mid-cap space and is overweight small and mid-cap stocks relative to the benchmark.”
According to the December-end portfolio, the Goldman fund had 18.3% weighting in mid-cap companies. Nearly 22% of the portfolio was oriented toward small companies.
Furthermore, Ng said the Franklin fund aims to maintain a more concentrated portfolio of 40 to 60 stocks over the long-term, fewer than that of the Goldman fund, which has 50 to 125 holdings.
As per the November portfolio, the Franklin fund had invested in 59 companies, with the top 10 holdings accounting for about 41% of the total portfolio.
The Goldman fund had exposure to 91 companies, with the top 10 accounting for 31% of the assets.
Ng also said the turnover rate of Franklin India tends to be lower than the GS India Equity portfolio, indicating that the Franklin fund is willing to hold its underlying equities for longer term.
ICICI Bank, HDFC Bank and Infosys Technologies featured among the top three holdings of the Franklin Fund.
The Goldman fund’s top three holdings consists of information technology companies: Infosys, HCL Technologies and Tata Consultancy Services.
ICICI Bank, HDFC Bank, Yes Bank, Axis Bank, Infosys and Sun Pharmaceuticals were the overlapping companies in the top 10 holdings of both funds.
The top three sector allocations within the Franklin fund were in financial, information technology and industrial companies. The fund was overweight on financial companies, which accounted for 32.3% of the portfolio, significantly higher than the 17.8% weighting the sector has in the fund’s benchmark index.
While the Franklin fund has its second biggest allocation in the technology sector (14.7%), it is underweight compared to the 23.2% weighting of the sector in the index.
The sector exposure is similar within the Goldman fund, with the financial, technology and industrial companies respectively representing a 24.3%, 17.8% and 14.2% allocation in the portfolio.
Performance review
According to Ng, both the Franklin fund and the Goldman fund performed very well in 2014, outperforming their relevant benchmarks and the average of their Indian equity peers.
“There are common factors that led to the outperformance of both funds, such as significantly heavier bets in financial stocks and vice versa in energy stocks against the relevant benchmarks.”
“Both funds are overweight in financial and industrial sectors, while both are underweight in information technology, consumer staples, energy and utility sectors. Overall, both funds benefitted from good sector allocation and equity selection in 2014.”
According to Ng, the Goldman fund delivered a better risk-adjusted return than that of the Franklin fund over the long-term.
The Franklin Fund has an FE Crown Rating of 3, while the Goldman fund enjoys a Crown Rating of 4. The FE Crown Rating is ranks funds based on alpha, consistency and volatility over the past three years.
Manager review
Stephen Dover has been managing the Franklin fund since its launch in October 2005. Dover is senior vice president and managing director, international chief investment officer of Franklin Templeton Advisors. He is responsible for overseeing the investment functions of locally-managed and distributed products in South Korea, Brazil, China and India.
Sukumar Rajah has been managing the Franklin fund along with Dover since August 2013. Rajah is managing director and chief investment officer of Asian equity for Franklin Templeton’s local asset management group.
Based in Singapore, he is responsible for overseeing regional and multi-country products, investment process development and enhancements in Asia. He is also responsible for overseeing the India equity group and is a lead portfolio manager of India-related funds and institutional accounts distributed outside of India, along with the Franklin Asian Flex Cap Fund.
Goldman Sachs did not name the lead portfolio manager of its fund. According to the factsheet, its India equity team manages the fund.
Fees
The Franklin fund charges a management fee of 1.5% compared to the Goldman fund, which levies a 1.75% fee.
The ongoing charges, or the total expense ratio of the Franklin fund was 1.88% for the year ended 30 June. The TER for the Goldman fund was 2.25%.
“The differences in fund sizes of both funds may have an impact on the fee differences,” Ng said.
Conclusion
According to Ng, with proven investment approach and track record, both funds should be able to add value for investors over the long-term as both funds are being managed by experienced fund managers.
“Due to the different focus and strategy of both funds, Franklin India should weather better during the falling market, while GS India Equity Portfolio tends to benefit more as equities surge.”
