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Similar Differences

Franklin India Prima and Reliance Growth appear identical but have evolved into different entities. The two have been around for more than a decade and shared identical NAVs in January 2005.

If we believe that tomorrow will be better, we can bear a hardship today. There's something affirming in a cliché. And investors in Franklin Prima will empathise with this one. Right now, they are flooding us with queries on whether it makes sense to stay put or get out because tomorrow may not be better.

In case you have not noticed, Prima has taken a beating on the performance front. From being the best performer it has slipped to abysmal levels. And its investors are a worried lot.

What's causing eyebrows to be raised is that its peer - Reliance Growth - is going great guns. This clearly indicates that the issue is not so much whether mid-caps as a whole are floundering but rather a fund-specific problem. If you feel that a comparison between Franklin India Prima and Reliance Growth is a dubious approach, consider this.

The two funds have an identical bent- diversified equity with a mid-cap bias. Are strikingly similar in terms of tenure - both have been around for more than a decade. Grapple with a huge amount of assets - they are the largest mid-cap funds. And the clinching factor is that they shared virtually identical NAVs in January 2005 - a difference of just 1.7. But that did not last for long. Since then, Growth has soared on the performance and ranking front and Prima has not been able to keep pace. Despite sharing much of common ground, they have followed very divergent paths.

When both these funds jostled for the top slot a few years ago, they managed to garner plenty of assets. With mid-cap funds, size is an issue. The bigger the size, the more restricting it is for the fund manager to take aggressive positions in small stocks. His ability to speedily get in and out gets diluted with increasing size.

Prima and Growth have had to contend with this issue and both fund managers must be commended for their handling of it. Unlike other funds, they have not held phenomenally high positions in cash. Neither have they taken diversification to the extreme by flooding the portfolios with stocks. Since January 2005, Growth has had an average of 40 stocks in its portfolio while the corresponding figure for Prima is 55.

What's interesting is that Growth, with a larger asset base, not only managed to hold fewer stocks than Prima but also delivered superior results. But the key differentiating factor between the two is not in the assets or number of stocks held but rather in their strategy and stock picking.

The Franklin Templeton group tends to portray themselves as style agnostic. So they refrain from being classified as aggressive or conservative or growth-oriented inves-tors. They like to keep it simple - buy on sound fundamentals and sell when the target price is achieved.

The perception of Reliance, on the other hand, is that of opportunistic investors who have no qualms about getting out of a stock, booking profits and re-entering at a later date. While this might have been the case earlier, it not necessarily holds true now. A look at the portfolios between January 2005 and May 2007 revealed that Prima held on to 18 stocks for a period of more than 24 months while Growth was not too far behind at 13.

Where Growth tends to score is in its ability to adapt to market movements. In a rapid bull run, they will look at growth stocks, not value. In a slower market, they will change their stance. This flexibility is extended even in the preference for market cap. If the need be, Growth will increase its large-cap substantially. For instance, in February 2006, 39.2 per cent of the equity allocation was in large-caps. Prima, by-and-large, has refrained from having too high an allocation to large caps and has touched 19.66 per cent (November 2005).

Reliance Growth is known as a pro-active fund that regularly churns out fresh ideas - a benefit from having their in-house research team. In January 2005, when the two funds' NAV was almost overlapping, they had six common stocks. Come May 2007 and the common stock is just one - Jai Prakash Associates.

Prima once known for its smart stock picking has tended to lag behind. Prima missed out on the sugar sector where short-term trading opportunities were available. But stocks like Balrampur Chini, Dhampur Sugar Mills, Mawana Sugars and Oudh Sugar Mills featured in the 2005 and early 2006 monthly portfolios of Growth.

Reliance Growth picked up steel stocks more than two years ago - JSW Steel, Jindal Saw, and Jindal Steel & Power - and that has paid off well. Reliance Growth has avoided real estate stocks but invested in Bombay Dyeing (indirect exposure to real estate) and Jai Prakash. While the latter is also owned by Prima, Ansal Properties & Infrastruture was bought when it was quoting at a steep rate in January 2007 and since then the price of that stock has fallen.

Don't give up on Prima just yet. The fund house is making changes that should help boost performance (read Interview on page 34). What holds Prima in good stead is a fine fund manager. Despite hitting a low, there is nothing stopping him from bouncing back. Looking at the pedigree of both fund managers, it is probably right to say that one is not better than the other. Just that one has made fewer mistakes and better picks. Though ultimately, that is what fund management is all about.