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Aarati Krishnan

Franklin Templeton already manages a range of top ranking diversified equity funds. It is now rolling out the Franklin Flexi Cap Fund, which it says will free its fund managers from the constraints of having to adhere to any pre-determined market cap range or investment style. Mr Sukumar Rajah, Chief Investment Officer (Equity) for the fund house, explains where the new fund could fit into an investor's portfolio:

Funds such as the Franklin India Prima Plus, Templeton India Growth Fund and Franklin India Opportunities Fund also invest in both mid-cap and large-cap stocks. How is Franklin Flexi Cap Fund different from these funds?

Franklin Templeton has five diversified equity funds in its product roster, each of which is positioned based on market capitalisation and investment styles. Franklin India Prima Plus is primarily a large cap fund with a marginal small/mid-cap exposure.

Typically the fund has a 80:20 split between large and mid-cap stocks. Templeton India Growth Fund is primarily a large-cap fund and Franklin India Opportunities Fund takes higher exposures to specific sectors based on emerging opportunities. As you know, Franklin Bluechip Fund is a large-cap fund and Franklin Prima Fund is dedicated to small and mid-cap stocks.

Given the distinct positioning of our equity funds, we had identified a need for an additional investment avenue from Franklin Templeton, which is flexible and not restrained by a pre-determined market cap strategy. To cater to this need, we have launched Franklin India Flexi Cap Fund that invests in companies based on a research driven, bottom-up stock selection process, irrespective of their market capitalisation. It is, in that sense, a pure diversified equity fund.

Why should an investor who already owns these funds invest in the Flexi Cap fund?

As stocks belonging to different market cap ranges exhibit varying performance and volatility characteristics over time, investors diversifying their investments can benefit from the growth potential of stocks across the market cap spectrum. However, given the large number of listed stocks, constructing such a portfolio can be a time-consuming and tiresome task for individual investors, making this fund an ideal avenue to achieve the same effortlessly.

Is Flexi Cap an asset allocation fund that will allocate between large, mid and small cap stocks? Have you set any weightage bands for each capitalisation range?

No, the fund seeks to invest in quality companies across the market cap range and sectors, based on fundamentals and valuations. In other words, the investment strategy of Flexi Cap Fund will be focussed more on individual companies and the wealth they are creating for their shareholders.

The allocation of the fund to stocks of various market caps will typically fit into the following bands - 20-100 per cent in large cap stocks, 0-70 per cent in mid-cap stocks and 0-40 per cent in small cap stocks.

To start with, will large, mid or small cap stocks dominate this fund's portfolio? Which segment of the market are you more bullish on?

The fund's investments will be based on a bottom-up approach rather than taking views of market momentum in various categories of stocks. The fund will be managed on the basis of Franklin Templeton's time tested approach to investing which focuses on individual companies irrespective of the market cap range they fall under.

In recent years, mid and small cap stocks have been performed well due to various factors. While the buying has been broadbased, mid-cap stocks have out performed large cap companies due to re-rating and increased interest from retail investors as well as growing institutional buying, especially from the FIIs.

The re-rating of these stocks combined with speculative activity has led to increased interest in the segment. But we believe that over time, fundamentals will assert themselves and some stocks with weak fundamentals, which have benefited by all-round buying, will witness correction.

The key point to note is that over time stocks belonging to different market cap categories have demonstrated different levels of volatility and investment returns. And it is important to remember that generally, no one class consistently outperforms the others.

This means investors seeking long-term investment success while managing risk, need to build a diversified portfolio of companies of different sizes.

We believe that this fund's strategy of investing in opportunities across sectors and market cap ranges through a bottom-up stock picking approach, will help investors in capturing the growth potential of corporate India in a comprehensive manner.

What investment style will it follow? Value or growth?

The fund will adopt a blended investment style. While broad analysis of the economy and various sectors will be used as a starting point, we will search deeply for businesses and managements creating wealth across market cap ranges. We will look to build a solid portfolio of stocks that has the ability to outperform the markets through economic cycles.

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