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Aarati Krishnan

K. N. Siva Subramanian, who has managed Templeton's flagship funds — Franklin India Bluechip Fund and Franklin India Prima Fund — for over a decade, likes to maintain a low profile. You won't find him on TV expounding on the stock market. For one, he does not keep a minute-to-minute vigil on the stock market and says he prefers to spend the day poring over newspapers, keeping track of corporate and economic developments. His rigorous focus on fundamentals shows up in the performance of Bluechip and Prima, which have consistently stayed several steps ahead of the market, for ten years now, with annual returns of 24 and 22 per cent respectively. Mr Siva Subramanian, who also manages the FlexiCap Fund and the Opportunities Fund, answers a wide range of questions from Business Line on fund management and performance.

Excerpts from the interview:

You have managed Franklin India's Bluechip and Prima funds for over 10 years now through a tumultuous stock market. What were the most challenging periods during your stint as fund manager?

I can't think of any specific period that impacted us too badly, or too well for that matter. As a fund, how we do depends mainly on corporate performance. That is something we cannot control.

But I do think that bull markets are far more challenging than bear markets.

The pressure to perform is greater in a bull market than in a bearish one. I make that comment because, in a bear market, you have more time to reflect on what you are doing. You have more time to make a thorough analysis of the companies that you hold in your portfolio. In a bull market, you have relatively little time to make decisions. You have to hit the ground running.

In India, equity funds have found it easy to trounce the indices in bull markets, but tend to lose much more value than the index when the market declines. What measures do you have in place to deal with a meltdown, if it occurs?

Frankly, we look at the index only as a benchmark that is used to disseminate information to investors. We don't do any kind of closet indexing and we don't consciously look at the composition of the index while selecting stocks. We don't use measures like a stop-loss to wind down our positions.

We go entirely by the fundamentals of the stock we are evaluating. If we think the fundamentals of a company have deteriorated, we cut exposures, irrespective of whether we have made any money on the stock or not. Where we think the fundamentals are still good, we may use a decline in stock price to build positions in the stock. So we are fundamentals-oriented rather than trading-oriented.

As to containing risk, that depends on how you structure your portfolio. Our fund house was the first to institute the position of a risk manager to monitor investments. We have restrictions on our exposures to individual industries and stocks; and we follow these quite rigorously.

We try to have a good diversified spread of stocks in our portfolio, with our funds holding at least 40 stocks; the exception is Bluechip, where we have always adhered to our original mandate of holding 30-35 stocks.

Most fund managers feel that a fund size of Rs 600-700 crore is appropriate for a mid-cap fund. But Prima has gone far past that size, at Rs 1,600 crore. Do you see size impacting performance? How are you dealing with the expanding fund size?

I don't think we have as yet reached a stage where we are feeling the pressure from size. If you look at the market capitalisation of the Indian stock market, it is about $400 billion. We are yet to see a single fund that is even at a billion dollars in size. If you look at the way fund houses have grown, we have hardly made any difference as far as local market is concerned. So I believe it is early to talk about size.

When we segmented our funds as large-cap and mid-cap funds in 1997, a market cap of Rs 500 crore was the cut-off for a stock to qualify as a large cap stock; but now the cut-off is at Rs 2,000 crore. Then, just 50 stocks qualified as large-cap stocks.

But as market capitalisation grew, the universe of stocks has expanded sharply. This will continue to happen and the definition of a mid-cap stock will keep changing.

But doesn't a large fund take longer to build and liquidate positions, especially when you are looking at small-size companies?

That is why we have been looking to spread our exposures in the Prima Fund across a larger number of stocks. We also brought in Satish Ramanathan as a co-fund manager a year ago, and this has helped expand our coverage universe for the fund.

The original terms of the Prima Fund also allow us to invest 15-20 per cent of the portfolio in large cap stocks, to take care of liquidity issues.

Over the years, some of the mid-caps we invested in have become large-cap stocks because they have crossed the Rs 2,000-crore (market cap) threshold. But we don't exit a stock just because it has crossed this threshold. We hold on, if we are convinced about the company's prospects.

We bought into MICO when it was a mid-cap stock, but today its market cap is over a billion dollars.

There has been a marked slowdown in the performance of Bluechip in recent months. It has under-performed other large-cap funds and also trailed the index on one-year returns... .

The last year has been tough on funds that focus only on large-cap stocks. Returns from the Bluechip have not been bad. But the fund has suffered on relative performance as compared to funds that invest in a mix of large-cap and mid-cap stocks such as the Flexicap Fund.

The Bluechip is positioned as a conservative fund. Through our stock choices, we try to reduce the fund's volatility as much as possible.

Comparing this fund with competing funds may not be correct, as there are very few equity funds that adhere strictly to a large-cap mandate, as Bluechip does. At Templeton, we are very particular about sticking to the mandate. The risk manager does not allow you to drift from your stated style.

As to underperforming the index, this has happened at times in the past, as well. We are not too focused on the composition of the index and tend to build our portfolio from bottom up. We have also had some issues with the oil exposures in the fund over the past year. Oil prices have gone through the roof, but the oil companies have not been allowed to hike retail prices. That partly explains our under-performing the Sensex.

Fund-houses have been expanding their basket of funds through new launches. Each fund too, seems to hold a larger number of stocks than before. As a fund manager, do you find it challenging to keep track of an expanding number of portfolios and stocks?

As a fund house, we have not launched new funds at the pace that others have. Even our Flexi-cap Fund was launched after almost three years; we launched it because we didn't have a product that could invest across the range of market caps.

In our fund house, the fund manager is important, but not as important as he probably is elsewhere. We have nine people, including the researchers, in the fund management team, who participate in investment decisions.

We have also given additional responsibilities to some of the research analysts to co-manage some funds. This helps us look at a larger universe of stocks.

We have expanded our team in line with the number of stocks we track internally. We have expanded our coverage beyond 200 stocks and now cover close to 300 stocks. If we need more resources, we will definitely add people.

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