The Hindu Business Line : `We will focus on rapid growth companies'

In a rapidly growing economy, a `growth style' might deliver better returns, albeit with higher volatility. K. N. SIVASUBRAMANIAN, SENIOR PORTFOLIO MANAGER, FRANKLIN TEMPLETON

Having managed many of its equity funds with a style-agnostic approach, Franklin Templeton Investments has recently unveiled a new fund offer, the Franklin India High Growth Companies Fund an open-end fund that will exclusively adhere to the "growth" style of investing. Mr K. N. Sivasubramanian, Senior Portfolio Manager, Equity, Franklin Templeton, explains why the growth style may work well in India at this juncture and how the fund will identify growth companies.

Excerpts from the interview:

Franklin Templeton has traditionally used a blended style of investing for the Franklin equity funds. What has prompted the launch of a pure "growth style" fund at this juncture? If this is backed by any specific research into how this style works in India, could you share the gist of it with us?

Our aim in launching a pure growth fund is to complement our existing suite of products. With the economy entering into a high growth trajectory, growth companies with good management will have the ability to deliver potentially higher returns, in the years to come.

However, given the inherent volatility of such stocks, we believe a pure growth fund would cater to investors with higher risk profile to take advantage of the potential. Historical evidence suggests that in a rapidly growing economy, a `growth style' might deliver relatively better return albeit with higher volatility. In comparison, developed economies such as the US would be more ideal for the value style of investing. Also based on growth measures such as long term PEG ratio, such companies have delivered superior historical returns.

It is believed that the growth and value styles of investing often outperform each other in turns. In our view, the stock market rally of the past three years in India has been driven mainly by "growth" stocks, while value-based strategies (based on dividend yield etc) have tended to lag. Will "growth" stocks continue to outperform over the next three-five years?

As an economy evolves, growth and value styles of investing tend to perform better based on the macro conditions. Given the dividend yield levels in India, one would suppose that over the coming years, companies ideally placed to take advantage of growth drivers such as increased consumption, capex and outsourcing trends are likely to deliver superior risk-adjusted returns.

What would be filters used by FT to identify growth stocks? Would this be a qualitative judgement or a quantitative one? If the latter, could you mention some of the filters to be used?

The fund managers will adopt a `growth style' of investing and it will be combination of quantitative as well as qualitative aspects such as management quality and vision.

We will be focussing on rapid growth companies (or sectors) which will be selected based on growth measures such as EV/EBITDA growth rate, price/earnings growth, forward price/sales, and discounted EPS. The fund will also combine top down industry themes with bottom-up stock selection to identify stocks/sectors exhibiting above average growth or high potential and the investment style would be as follows:

Primary focus will be to identify `high growth' companies, especially in sectors witnessing above-average growth.

Blend of top-down (macro analysis to identify sectors) and bottom-up approach (micro analysis to pick stocks within these sectors)

Shifts between companies and sectors to be identified based on relative valuations, liquidity and growth potential

Will this fund be managed in a flexicap style or will it have a mid-cap bias?

The fund will not have any market cap bias.

Will this fund make active use of its mandate that allows investments in foreign securities? Will it search globally for growth stocks? If so, what proportion of the assets may be deployed overseas?

The fund will look to invest in overseas securities if the current overseas investment limits are enhanced and we are able to find relatively better growth opportunities outside India. It has the flexibility to invest up to 35 per cent in overseas securities. At this juncture, we believe pure growth opportunities are more likely to be found in growing economies like India.

Who are the target investors for this fund? Would it be individuals with a higher risk profile?

From an investment perspective, capital appreciation can be achieved by investing in companies exhibiting high growth rates or those with the potential for higher return on equity. FIHGCF would be an ideal investment avenue for Indian equity investors who are looking for the additional growth (with commensurate volatility) as well as first time investors with the higher risk profile.

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