Franklin Templeton MF’s first new fund offer (NFO) since April 2020, a balanced advantage fund (BAF), is open till 30 August. In an interview to Mint, Anand Radhakrishnan, managing director & chief investment officer – Emerging Markets Equity – India, Franklin Templeton (FT) talks about the latest launch. Edited excerpts:
After April 2020 FT debt fund shutdown, investors will have concerns about your BAF. How will you allay those?
The debt strategy of BAF will be totally different from that of the funds that were shut down. Those funds had a good proportion of bonds which were illiquid because of their slightly higher or perceived higher credit risk. However, in the BAF, over 80% of the debt portfolio will be in AAA securities issued by the government, PSU banks, manufacturing companies and NBFCs. We will take duration risk but not credit risk.
Also Read : UPI’s dominance in payments landscape: What data shows
Where will the remaining 20% be invested?
Any bond index has a good mix of AAA and AA debt securities. In fact, our current debt and hybrid funds, have a portfolio that is more conservative than the typical Crisil Bond Index which has a mix of AAA, AA and A debt securities. So, we will have more AAA bonds than the index. But we are not ruling out AA or A securities as yields can be more attractive. The effort in BAF will be on deriving value from the right mix of equity-debt and by holding the right equity stocks. Debt will be mainly used to minimize risks from equity.
Will your BAF be strictly model-based?
The fundamental anchor of the BAF model is our quantum model. Only plus or minus 15% will be qualitative which means, if the model says you should have 50% in equity, then we can go to 42.5% or 57.5%. The fund manager’s primary role is to follow the model and implement it without a flaw. We have used multiple parameters to iterate on it in the past, and five years back, we decided that the price-to-earnings and price-to-book combination explains 90% plus of the optimal asset allocation. These will be based only on the past declared data for the NSE 500 companies to remove the bias of future estimates. We think that future data in India is overly optimistic and therefore, needs to be calibrated.
In the past 5 years, your flexi cap, large cap, mid cap and small cap funds have underperformed. Why is that?
In flexi cap and large cap, we had a very challenging time through 2018 and 2019. The markets were narrow and a small set of stocks were pushing the index. Our portfolio was overweight on the part of the market that was going down and underweight on the part, going up. This put us behind the benchmark. Some of it has reversed post Covid. I think that we will catch up because still there is meaningful relative undervaluation in our portfolios versus the market and maybe versus peers as well. On the mid cap and the small cap, the bulk of the gap in performance happened in the past two years. Our portfolios were probably not prepared for the high liquidity that came into the market, both global as well as domestic. This created massive returns and led to pockets of heavy overvaluation in the lower end of the market, which traditionally, we have been careful about keeping away from.
Second, we had small proportion of IT and some of the global stocks, and more of domestic cyclical, industrial, midcap cement, and financials. Over the past 6-9 months, the midcap fund performance has improved. Third, many of the stocks we’ve owned were users of commodities and they went through earnings dive. With commodities correcting, they should be coming back.