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Suresh Krishnamurthy

Mr Nilesh Shah

AFTER a chequered start, the performance of Templeton India's funds has improved in the last couple of years when the conditions for equity investments have not been encouraging. Business Line recently spoke to Mr Nilesh Shah, Chief Investment Officer, Templeton India Asset Management Company, on various issues relating to the performance of their funds, the positioning of their funds and the market outlook. This is the first of a two-part interview.

Excerpts from the interview:

Is the excessive orientation towards value stocks behind the recent good performance of a few funds?

If you look at the last ten years, the index has more or less remained flat. That does not mean the Indian equity market has given negative returns. You can count many companies that have multiplied wealth for shareholders. And they were not surprise candidates. For example, companies such as Hindustan Lever, HDFC, Dr Reddy's and Infosys. The investor had a view that these companies would last five-ten years. Are these companies growth or value stocks? That classification does have some value. But, if you have to pick a common thread, what comes out is they are good businesses under good management.

Are you saying that in emerging markets, the distinction between growth and value stocks are irrelevant. That all stocks are growth stocks?

No, it is not exactly that. If you are following value philosophy, you cannot ignore the growth aspect. Somewhere in your projections, the growth projections are factored in. If you are following the growth philosophy, the value aspect cannot be ignored either. That is because there is a price to be paid for growth. Clearly, value gets imbibed into growth and growth gets imbibed into value. How do we distinguish growth stocks vis-à-vis value stocks? The broad parameters that are applied to developed market stocks cannot be applied to Indian markets in isolation. In India, many a times, the boundaries are not so clear. Many stocks lie in the grey area rather than in pure black or white. That is where a disciplined process makes a big difference.

In terms of positioning of the funds, how are you going to distinguish between value and growth? Clearly, the problem for fund managers is quite complex?

This problem will continue. That is where a disciplined process comes in. How do we distinguish between value and growth stocks... the value side is handled by Dr Mark Mobius and he is the best person to comment on that. I handle Franklin India Growth. To us, growth could be in the top line, bottom line or return on equity. These are three parameters that distinguish the growth stock from the value stock. When we see a company growing at an average rate that is higher than the sustainable growth rate for the industry, it becomes a growth stock for us. So, the first filter is an above average industry rate on any of the three parameters. Then I want to go to those growth stocks where there is a reasonable value. To find out if there is value, we calculate forward earnings and based on that we use various parameters such as EPS, price-to-book value and price-to-cash flow. In the end, we arrive at a certain price for picking up the business opportunity. So, it is actually growth at a reasonable price.

So, you find no problems in positioning your growth and value funds?

Precisely. Many a times we start from a different path but still end up buying the same stock.

Will that not create confusion in the minds of investors — the same stock featuring in both portfolios?

It does create confusion in the minds of investors. That is where the clarity that we can give by way of this meeting or by way of investor communication is more important. It is very easily possible for a stock to be classified as both growth and value. Growth because the company is growing at above the industry average rate, and value because it is available cheap. In hindsight, we can say that Infosys or Dr Reddy's looked cheap five years back. But, five years ago they did not look cheap. So, it is the vision of the fund manager or researcher that values the company. So, a growth stock may look cheap while a value stock may have the potential to grow. The grey area will always remain. The problem is much more acute in an emerging market.

Are there any distinguishable risk characteristics between Templeton India Growth and Franklin India Growth?

Templeton India Growth tries to outperform BSE Sensex while Franklin India Growth tries to outperform the BSE National Index. Yes, we may have the same stocks but the weightage could be different. Maybe FIGF will have 20 per cent in technology sector but TIGF may have only 5 per cent. Therefore, the risk return parameters will be completely different.

The recent mid-cap rally has left the entire mutual fund industry on the sidelines. None of them had any meaningful exposure to such stocks. Why has this been the case?

We were not that invested in mid-cap stocks though we had a few in our portfolios. The point is we want to remain invested in large-cap liquid stocks. We really do not want to go into mid-cap stocks in a big way. The risk-return profile of large cap stocks is completely different from that of mid-cap stocks. In the last ten years, mid-cap stocks took a beating.

Today, they have gone up from such beaten down valuations. There was clear value in it. No doubt about it. But their trade-off is completely different. I would rather have a mid-cap fund with a higher risk-return profile than blend it with my existing large-cap portfolio.

Since most mutual fund managers are likely to feel the same way, does it not make sense for investors directly investing in such stocks also in the absence of mid-cap funds?

Not necessarily. Over a period, you will have small-, mid- and large-cap funds with growth and value focus in the market. Mutual funds will create products to cater to investor needs. Today, I do not have that fund because I do not have sufficient feedback from my investors. I will not be surprised that if there is an appetite for such funds, people will launch such funds within the next six months or a year.

(To be continued)

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