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Franklin Templeton India went through hell following the 2020 debt fund crisis. The performance of its funds, assets and investor confidence, they all took a beating. Three years on, the bruised fund house has set out on the road to redemption. Its MD and CIO of emerging markets equity (India), Anand Radhakrishnan, sat down with Chirag Madia to pick up the pieces. During the interview, he explains the fund house's investment philosophy, why he remains bullish on new-age tech companies and how he'll regain the trust of his investors.
Indian equities have been quite volatile in the last few weeks. How do you look at the markets given the concerns of recession and slowdown in global and domestic markets?
There is no doubt that the US and European markets will slow down. Indian markets, however, won't be significantly impacted by those events in developed economies. Nevertheless, some sectors, such as IT, metals, and health care, which are globally linked, could face headwinds in the near future. In addition, somewhere during the year, there is also an expectation that inflation and interest rates will peak in the western world and the Fed will move away from significant tightening. We will have the bulk of the economic headwinds in the first half, while inflation and interest rates should moderate in the second half.
Looking at India, we still have fairly robust domestic growth. Inflation and interest rates are not high compared to the decadal average, so it's very unlikely that India will have significant growth challenges on the domestic front. In addition, many companies that faced headwinds in terms of margins in 2022 because of high raw material prices and global commodities prices will experience some moderation. Therefore, from a big-picture perspective, we should not have too much trouble.
What measures have you taken to immunise your portfolio from any slowdown or recession-like situation?
We are trying to look at regional growth-related factors rather than global growth-related portfolios. The themes can be normalisation of the banking sector, real estate recovery, domestic discretionary consumption and PLI-linked opportunities, among others. There are some opportunities in insurance. There are multiple opportunities which are more domestic driven than international, till the time we get clarity on the global front.
Over the last two years, value has emerged as the dominant theme. As a result, your AMC has had great success. Given the cyclical nature of the theme (as seen over the last decade), will value continue to outperform growth in the near future?
There are enough reasons to believe that the valuation gap between so-called high-quality growth companies and cyclicals (I will not call them poor-quality growth companies) still remains reasonably high. The portfolios that are biased towards growth and reasonable price (GARP) rather than growth at any price will continue to do well in 2023. I think this was a theme that played out through 2022, and even towards the latter half of 2021. Markets will continue to prefer companies where margin of safety in terms of valuation is still meaningful. It is not as if we only buy cheap value stocks all the time. We do want to buy good quality and high-growth companies, but we do not want to overpay for them. Because if you overpay, then you don't make a return for many years. We do not want to make the mistake of just owning a company and assuming that irrespective of what valuations we buy, we will make money. Investing in GARP stocks like beaten-down banking stocks, consumer discretionary in auto and consumer durables have helped us to gain back the performance after underperforming in 2019 and 2020.
How can investors immunise their portfolio from high volatility in growth stocks and lower volatility in value stocks?
One cannot have the best of both worlds - you cannot have higher returns and very low volatility. If you are comfortable with what you are paying for in terms of valuation, there may be some volatility in the stock because, by its very nature, cyclical growth stocks are a little more volatile than stable growth stocks. But it is better to make slightly better returns with higher volatility than to make suboptimal returns with very low volatility. Hiding in a safe place is not the best solution all the time. It may have worked during COVID or even in an environment post-demonetisation when economic growth was uncertain. One can hide in specific places where volatility is low, but that is not the best way for investors. We think the best way is to buy businesses that will grow well.
In recent years, most of your equity funds have not had many inflows - and in many cases, they are witnessing sustained outflows - despite seeing a turnaround in performance since 2021. What are the reasons for this trend, and what measures are being taken at the AMC to address the issue?
During 2019-20, a lot of people were focused on short term returns. So, during the COVID-19 period, money was moving into the funds that did very well between 2018 and 2020. Many of those funds were focused on quality investing as a theme. At that time, we were more cyclical value-oriented and did not attract money. As a firm, we had some business challenges during 2020 resulting in people adopting a wait-and-watch approach. They knew that our long-term performance was good and that we would perform well going forward.
We are now slowly gaining traction, especially from the IFA community, who have been very supportive of us and resumed building our SIP book gradually. Even our national distributors, like banks, have started adding our equity funds to their distribution platform based on performance. Once we are able to generate returns over market cycles, we will get back investors and increase our market share.
Despite a turnaround in your diversified funds in categories such as flexicap, focused and ELSS, your bluechip fund's performance has continued to decline. What are the reasons for this trend? Is alpha generation in the large-cap space becoming a genuine concern for fund managers, given the rise of passives in recent years, particularly in this space?
If we talk specifically about the bluechip fund, one of the factors is that we had IT in the portfolio, which meaningfully corrected in 2022. The investments in a few 'new age' tech companies pulled down our performance too. But that pullback is temporary. Businesses are evolving, and growing businesses tend to be a little volatile in the early stage of their evolution. Now that we have lived through it, built positions, and managed it carefully, we should be able to claw back some of the relative underperformance we have had in recent times. Also, we have strengthened our equity team and have a new portfolio manager for Franklin India Bluechip Fund. It is only a matter of time before we start to see better numbers from the fund.
Coming to the question of passive versus active, yes, today's money managers will definitely have a more challenging task at hand in that (large-cap) category. One has to work harder, and the portfolio needs to be sharper. One needs to significantly take differentiated bets versus the index to outperform the index. If you want to beat the benchmark, you cannot follow an index plus or minus strategy - one cannot hug the index. If active fund managers give more or less index kind of returns, investors will not come to an active fund. The approach to beating the index has become more nuanced and sophisticated. Ten years ago, it was easy to outperform the index, but not anymore.
We see some of your funds investing in 'new-age' companies in recent months. What is your thesis for investing in these companies? Do you think the worst is over for them?
From their IPO time till now, we have seen a fair amount of value erosion in these companies. Some of these companies, if not all of them today, offer a lot more margin of safety than they were offering at the IPO time. Then, the IPO market was very buoyant, and valuations were at a significant premium. Post the recent correction, most of those companies have moderated in terms of valuations.
Secondly, we have seen more data, disclosures and updates coming out of these companies in the last two to three quarters. Investors are now getting more information than they had at the time of IPO.
Thirdly, during the IPO, a very limited amount of stock was offered to investors. After the completion of the compulsory lock-in period, we are witnessing a lot more liquidity in stocks, leading to fair valuations of these companies. These are the reasons why we are a little more constructive today than we were earlier.
And the final point is that these businesses are founded on the right fundamentals. They are valid business models and deliver value to clients by doing business differently and in a disruptive way. Any new business model evolves over time and tends to be a little volatile during the early stages of their evolution. Once profitability is established, stability will also come in those stocks. I think the market is worried about whether these companies are going to make money or not.
I would like to give an analogy of the telecom sector to those who think that they will never make profits. One of today's biggest names of the telecom sector was not making much money when it went for an IPO. In fact, after the IPO, they went down by around 40-50 per cent. But since those lows, they are now 30 baggers. The telecom sector once had a lot of players, but over time there was consolidation. Later, the pricing power came, and today we are seeing very healthy profitability numbers from the consolidated players. The same can happen in a food tech, health tech or an online retailing company. But you need to allow for that system to evolve. It may take time, and investors would need to have patience.
This interview was conducted in January 2023
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