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A Focussed Approach

Having only one business and doing it well has done wonders for Franklin Templeton AMC and its investors. Funds from this AMC should definitely find a place in your portfolio.

Of the five largest AMCs in the country, Franklin Templeton is not part of a larger business group. While HDFC, Prudential-ICICI, Birla and others draw powerful synergies from the many other manifestations of their brand, Franklin-Templeton has attained its size and market share through doing just one thing, doing it well and continuing to do it well for more than a decade.

Background
Franklin Templeton's funds have two distinct lineages. One is Templeton AMC, which started in 1996, and the other is the onetime Kothari-Pioneer AMC, whose descendant, Pioneer-ITI, was acquired by Templeton in March 2002. Templeton International in turn is a wholly owned subsidiary of Templeton Worldwide, which is in turn a wholly owned subsidiary of Franklin Resources. Franklin Resources operates as Franklin Templeton International. Franklin Templeton manages assets worth US$ 350 billion (Rs 15,40,000 crore) and operates in 28 countries making it one of the largest global asset management companies. Franklin Templeton is the third largest independent fund management group in the US, and also has the distinction of being the first and the only mutual fund company to be added to the S&P 500 in the U.S.

Kothari-Pioneer began functioning in 1993 as a JV between the Chennai-based Shyam Kothari family (through ITI, Investment Trust of India) and the Pioneer Group, a US-based mutual fund. The AMC's ownership changed in 2000 when ITI was acquired by TCK Finance. This change came into effect in 2001 and the AMC was now called Pioneer ITI. In 2001, Pioneer was acquired by UniCredito Italiano, an Italian bank and so there was a change of ownership once more. Kothari-Pioneer (and Pioneer-ITI, as it was later called), was run in a fiercely entrepreneurial and innovative manner by CEO Vivek Reddy, who headed the AMC till it was acquired by Franklin Templeton in 2002. It's innovations include the first launch of open-end funds in India, at a time when infrastructure and market dynamics made it look like an impossible task to manage.

Performance
Templeton AMC started off by launching its Templeton India Growth fund, a diversified equity fund. In the next few years it added to its product line by launching an income fund (Templeton India Income), a liquid fund (Templeton India Liquid) and a government securities fund (Templeton India Government Securities Fund).

The early years were not too good. The flagship Templeton India Growth Fund (TIGF) underperformed its benchmark till 1998, mostly due to its strict adherence to its value-investing credo. In both 1997 and 1998, the scheme rested in the category's basement and underperformed its benchmark, the Sensex. A third quartile standing was all that was achieved in 1999. Strict adherence to its value investing philosophy was the major factor behind this dismal showing. Thus the fund avoided sectors such as FMCG and pharma, which were booming in late 1997 and 1998. The absence of stocks like HLL capped the fund's upside. Heavy investments in cyclicals and PSUs saw the funds NAV take a hammering in the wake of the South East Asian economic crisis in 1998. The absence of IT stocks also held the fund back in 1999.

By 2000 the fund had a makeover and introduced IT stocks into its portfolio. The AMC also launched Franklin India Growth fund, which would follow a growth oriented investment approach. As the equity rally came to an end a bull market in fixed income securities replaced it. Templeton AMC had the basic debt fund products in its stable, and benefited strongly. By February 2002, Templeton AMC had grown to become the 6th largest AMC in the country.

Acquisition of Pioneer ITI
It was at this point that Templeton acquired Pioneer ITI. This move instantly gave Templeton a product basket, which contained some of the oldest and best equity mutual funds in the country. The stars of the Pioneer line-up were Bluechip and Prima, which are India's oldest private sector funds. Both funds have unmatched long-term performance, with 28.30 per cent and 21.54 per cent p.a. returns over more than a decade.

Along with the Pioneer products and assets came a vast pool of retail investors. The Rs 4,022 crore of assets took Templeton AMC's total AUM to nearly Rs 8,000 crore, making it the largest AMC at the time. More important was the manner in which the merger was handled. Not a single equity fund manager of erstwhile Pioneer ITI left the new organisation. Undoubtedly this gave Pioneer ITI investors much comfort and to this day the schemes continue to flourish with equity managers who have one of the longest track records in the industry. The fact that the AMC's CEO today is Ravi Mehrotra, who came over as Pioneer ITI's CIO, is proof that this was a genuine merger of two companies.

Templeton also acquired the registrar operations of Pioneer. This gave it an in-house ability to service investors, while maintaining an eye on the quality of service. At the same time as funds are allowed to charge for the registrar function this was an attractive business in its own right. In 2003 this business was hived off into a separate entity in the form of Franklin Templeton International Services.

Templeton AMC now had virtually every possible type of mutual fund product. In fact in many categories there was overlapping as each AMC had an existing product. This issue is now being addressed with Templeton merging many similar schemes together. Thus, Templeton has merged Franklin India Vista Fund into Franklin India Prima Plus and FT India Index Nifty Fund into Franklin India Index Fund. The fund's two liquid schemes, two balanced schemes and three gilt funds and these are also expected to be merged to produce one of each type of scheme. Product focus should also reduce the confusion in the minds of potential investors, expedite the investment decision and make life easy for the distributors as well.

Along with merging schemes Templeton has recently converted Franklin Internet Opportunities fund into a more diversified Opportunities Fund. This scheme was launched at the height of the technology boom.

Franklin Internet Opportunities Fund focussed on the growth opportunity that the Internet revolution was expected to bring about — by investing in companies that were fuelling the Internet revolution, and in those that were likely to benefit from it. This gave the fund a mandate to invest in a wide variety of sectors such as banks and FMCG.

Along with proactive management, this freedom has allowed the fund to protect returns in a better manner than many of its competitors. How the new focus affects its returns remains to be seen. The presence of a number of good schemes in both equity and debt has enabled the fund to be the first to launch Fund of Funds in India.

Today Franklin Templeton has evolved to a stage where it has many innovative products in its stable. These include India's first infotech fund, only private sector pension scheme and the Templeton Floating Rate Income Fund, the first floating rate income fund to be launched in India. The AMC also manages Franklin India International Fund, which invests in US government securities.

Templeton has also been the first AMC to launch institutional plans on the debt side. These schemes are meant for big-ticket investors and pass on the lower cost of mobilising funds in the form of lower expenses. After this launching institutional plans became a craze in the mutual fund world. Templeton, however, took a measured approach and did not launch an institutional plan in its short-term and cash fund. Its rationale was that expenses were already low in these funds. This has allowed Templeton to maintain higher profitability in these schemes and if their size is anything to go by, investors do not also seem to mind.

Outlook
Post-merger Templeton AMC has played its cards well and there do not seem to be any outstanding issues of concern. This is one of India's best-run AMCs.

Strategy Note
Ravi Mehrotra
President,
Franklin Templeton Investments (India)

Investment Philosophy
We follow a disciplined approach to investing with a strong process orientation that serves as a common thread running through all our schemes. The key guiding principle to our investment philosophy is - maximise the risk-adjusted returns for our investors in the respective asset classes, and create wealth for them over the long-term.

Our investment philosophy encompasses rigorous risk management processes, which include a dedicated risk manager who works closely with our investment teams in monitoring and evaluating the performance of our schemes. These processes that are part of our global risk management philosophy are based on risk budgeting, risk decomposition, hurdle rate and peer reviews.

On the Value that Templeton
has added to acquired schemes FT's global research and capabilities help fund managers to see Indian companies/sector from a broader prospective. The local investment team is able to draw from the insights gained from similar companies/sectors in other markets, looking at performance during different market/economic conditions, the risks involved and growth drivers etc.

Five years down the line?
Given that mutual funds still constitute for a minor amount of the household savings pie in India, we believe that the industry as well as Franklin Templeton have an exciting future. Future growth will depend upon the ability to garner a higher share of the household savings of the Indian investor.

While the industry has a long way to go, we expect it to grow more rapidly and mature at a much faster rate than it has done in the western countries. The litmus test for the industry would be to expand the distribution network to sub-urban and rural areas where most of small investors live. The challenge would be to educate these investors about the advantages of investing in mutual funds compared to traditional saving instruments.

In this context, our vision is to make Franklin Templeton a household name that stands for the highest standards in the areas of investment performance, services and transparency.