The 5Ps of Equity Investing THE FRANKLIN TEMPLETON WAY

Transcription

1 The 5Ps of Equity Investing THE FRANKLIN TEMPLETON WAY

2 An investment in knowledge always pays the best interest. -BENJAMIN FRANKLIN

3 Your success in investing will depend in part on your character and guts, and in part, on your ability to realize at the height of the ebullience and the depth of despair alike that this too shall pass. John Bogle, Mutual Fund Industry Pioneer. The world we live in is non-stationary and non-linear and moves in an unpredictable manner and so do financial markets. But, how does one go about investing in equity markets, especially in a difficult environment, like the one we face right now? One may feel that being nimble-footed in tackling the vagaries of equity investing is a good strategy, but in reality, it s easier said than done. Investing through equity mutual funds can be a very good option for any investor looking to invest in equities. Mutual funds, as we all know, are professionally managed, well-diversified and cost effective; but, with over 400 equity schemes managed in the industry, it s a tough job for any investor or advisor to choose the few schemes that are likely to make investing in them worthwhile. The endeavour of this note is to give readers an opportunity to understand some principles one may use, while selecting an equity mutual fund, irrespective of the financial market condition. We have all heard of the 4 Ps of Marketing which are the bedrock of a sound marketing strategy. Taking a cue from them we have put together the 5 Ps of Equity Investing which can serve as a simple, but effective tool for any equity mutual fund investor to short-list a good scheme for investing. The process hinges on 5 critical parameters that one should look at, to help make the selection process meaningful and robust. 1 PEOPLE This refers to the fund house and its fund management team. It is an assessment of whether the investor s money is in good hands and can create significant level of comfort while taking the investment decisions. Some key questions to ask: How stable is the fund management team? What is the experience of the fund management team? (across cycles, comparable mandates.) Does the fund manager (or the fund management team) instil a high level of confidence in their communication? How stable is the firm s ownership? Has there been a change in the firm's ownership? Does the firm s management team (other than fund management) instil confidence?

4 Franklin Templeton India Equity Team The core equity team at Franklin Templeton Investments in India comes with a cumulative industry experience of over 225 years, of which over half has been with the firm. In terms of size, we also have one of the largest buy side teams in the industry. F R A N K L I N T E M P L E T O N I N V E S T M E N T S FRANKLIN INDIA EQUITY TEAM TEMPLETON EMERGING MARKETS TEAM Franklin India Equity Team: Strong Intellectual Capital Experience in managing a diverse range of portfolios across market cycles and across small, mid and large-cap stocks. Well-established relationships with local contacts. Focused on the local market while tuned in to global trends. Adheres consistently to investment objectives and philosophy. Frequent company visits and meetings with industry people to form independent views. Franklin India Equity Team Structure: STEPHEN DOVER, CFA MD & CIO - International SUKUMAR RAJAH MD & CIO Asian Equity 22 years of industry experience With FT since 1994 SIVASUBRAMANIAN, KN CIO Franklin Equity India 24 years of industry experience With FT since 1993 ANAND RADHAKRISHNAN, CFA Portfolio Manager & Head of Portfolio Analytics 18 years of industry experience With FT since 2004 ANIL PRABHUDAS Portfolio Manager & Research Analyst Hotels, Packaging & Sugar 20 years of industry experience With FT since 2003 MURALI YERRAM Dedicated Portfolio Manager for Foreign Securities & Research Analyst for Information Technology, Banks, Finance & Insurance 5 years of industry experience. With FT since 2007 SHALABH AGARWAL Research Analyst Cement, Construction, Healthcare, Power & Utilities 8 years of industry experience. With FT since 2012 Global Risk Management CHAKRI LOKAPRIYA Portfolio Manager 15 years of industry experience With FT since 2008 JANAKIRAMAN RENGARAJU, CFA Portfolio Manager & Research Analyst Media, Telecom and Mid-cap stocks 15 years of industry experience With FT since 2007 HARI SHYAMSUNDER Research Analyst Auto and Oil & Gas 5 years of industry experience With FT since 2009 PEEYUSH MITTAL Research Analyst Engineering and Non-Ferrous Metals 6 years of industry experience With FT since 2011 ADDITIONAL RESOURCES Trading Desk (Prakash Natarajan and Deepak Subramani) ANAND VASUDEVAN Portfolio Manager & Head of Research Banks, Finance and Insurance 15 years of industry experience With FT since 2007 ROSHI JAIN, CFA Portfolio Manager & Research Analyst Engineering 10 years of industry experience With FT since 2005 NEERAJ GAURH, CFA Research Analyst Consumer, Retail, Auto Ancillaries, Agriculture & Logistics 5 years of industry experience. With FT since 2010 AVNISH TIWARI Research Analyst Metals and Mining 12 years of industry experience With FT since 2012 Product Management

5 Templeton Emerging Markets Team: A Team Approach A Large and Experienced Team - Templeton Emerging Markets Team is represented in 4 continents by 52 dedicated portfolio managers and analysts, with an average of 11 years in the industry and 8 years with the firm, located across 18 offices. Rigorous and Consistent Investment Process - A time-tested investment philosophy built upon a disciplined, yet flexible, long-term approach to value-oriented emerging markets investing which allows Templeton to look beyond short-term news, noise and emotion. Peer Review Discussions - A challenging and rewarding team approach with weekly peer review meetings and semi-annual team conferences. Templeton Emerging Markets Team Structure: DR. MARK MOBIUS Executive Chairman Templeton Emerging Markets Group CHETAN SEHGAL Chief Investment Officer / India 20 years of industry experience With FT since 1995 RAJESH SEHGAL Sr. Executive Director / Sr. VP 17 years of industry experience With FT since 1999 VIKAS CHIRANEWAL Vice President / Deputy Director 8 years of industry experience With FT since PHILOSOPHY Good fund management teams /fund managers have a distinct investment philosophy or style of investing. Some fund managers prefer to invest in equities with upward momentum. Others prefer to buy under-valued equities at bargain prices. In fact, there are several different investment styles. The most common of these are Value and Growth. Investment styles may be periodically in and out of favour with the stock markets, but tend to balance out over a full market cycle. Knowing a fund manager s investment philosophy can help understand the rationale for specific security transactions implemented by the manager over time. It can also help put performance in bull and bear phases in context. Some key questions to ask: How clearly defined is the investment philosophy? What are the advantages /disadvantages of this style? Does the philosophy inspire confidence? Franklin Templeton Investment Philosophy: Across Value and Growth The equity fund management team at Franklin Templeton adopts an investment style that is across value and growth, where the Franklin India Equity Team focuses on Growth and the Templeton Emerging Markets Team focuses on Value. The focus has been on a bottom-up style of investing where emphasis is put on researching and evaluating individual companies which display a long-term potential of wealth creation.

6 Franklin Templeton in India: Two distinct equity investing styles Franklin India Equity Team Templeton Emerging Markets Team Focused on Growth Focused on Value 3 PROCESS The process is how the philosophy is executed. Some key questions to ask: Is there a well laid down, comprehensive process in place? How much flexibility does the fund manager has in decision making, vis-à-vis the fund house? How are stocks researched? How is risk managed? How adequate and effective is the risk management process? Does the process inspire confidence? Franklin India Equity Process IDEA GENERATION Depth and width of experience of the team help spot ideas quickly Benefits of past mistakes - knowledge of what to avoid Extensive network of contacts built over 10 years of investing in Indian equities Consistent philosophy with continual refinement BUSINESS ANALYSIS Deep understanding of businesses Long-term view of the business Ability to look beyond short-term noise PORTFOLIO AND RISK MANAGEMENT Ability to capitalize on abnormal price movements Balance between excessive trading and being passive Support from global risk managers Continuous flow of new ideas List of 300 companies, 100 core 60 companies on recommendation list High alpha Appropriate diversification Medium turnover Healthy risk-adjusted returns STOCK RECOMMENDATIONS Team approach and debates Appropriate templates and valuation tools PORTFOLIO CONSTRUCTION Time-tested approach has historically yielded consistently superior long-term investment results Philosophy remains unchanged, with continual improvement and refinement of our investment process

7 Templeton Emerging Markets Process TEMPLETON S BOTTOM-UP STOCK SELECTION PROCESS STEP 5 Evaluation and Portfolio Maintenance STEP 4 Construct Portfolio STEP 3 Peer Review STEP 2 In-Depth Fundamental Analysis STEP 1 Identify Potential Bargains Ongoing Valuation Analysis Disciplined Sell Methodology Weekly Peer Review and Risk Analytics Investment Guidelines Allocation Model Diversified Portfolio Continual Review Process Peer Review and Analysts Sets Final Target Price Action List Inclusion ( Securities) Quantitative Analysis Qualitative Analysis Sector and Country Input Initial Screening (3,000-4,000 Securities) Global Contacts Master List (21,000 Securities) 4 PORTFOLIO This refers to the portfolio put together by the fund manager. Some key questions to ask: In terms of sectors /stock composition and portfolio turnover, is the portfolio true to its mandate? What is the concentration risk in the portfolio? Is there sufficient rationale for areas of concern? Consider the example of Franklin India Bluechip Fund: FIBCF is a fund with an 18 year track record of investing primarily in large-cap stocks. Does it invest only in large-cap stocks? Depending on fundamental views, we might sometimes look at mid-cap companies with a market capitalization close to that of the large-cap ones, but the primary exposure is towards large-cap stocks. Since inception, it has always remained true to its mandate of investing in large-cap stocks, irrespective of the market conditions. This sets the fund apart from other funds, which may have changed their investment strategies to adapt to market conditions. Giant Large Equity Style Such a style consistency helps the investors understand the risks they are undertaking and the possible performance characteristics of the fund. If a fund doesn t stay true to its investment style, investors will not have an idea of the type of risks they are undertaking. Small Micro Mid Deep Val Core Val Blend Core Grth High Grth Period: 1 December 1993 to 30 June 2012 Franklin India Bluechip Growth BSE Sensex India Source: Morningstar, from 1 December 1993 to 30 June 2012

8 5 PERFORMANCE Performance refers to the NAV movement of a fund. In our opinion, performance analysis can help validate the strategy and its execution over a particular period. At another level, it can also help understand the underlying risks (other than concentration risk) to holding the fund. Performance Analysis to Understand Risk Risk, by itself, can be the subject of a long and elaborate discussion. Risk can be perceived in different ways. Here are some of the ways of perceiving risk: Standalone volatility. Volatility relative to a benchmark. Maximum possible loss. Depending on how one perceives risk, one could choose a measure that helps quantify the extent to which the past performance reflects that risk. To assess the historic standalone volatility, one could see the fund s Standard Deviation. To assess the historic volatility relative to a benchmark, one could see the fund s Beta. To measure the historic maximum possible loss, one could see the fund s Maximum Drawdown. Performance Analysis to Validate Strategy and Execution Good performance is a reflection of good strategy and /or good execution. What constitutes good performance is something over which opinions can vary. For most advisors and investors, the as-on-date returns form the basis of performance analysis. As illustrated earlier, such an analysis carries with it the risk of end-point-bias, i.e. the most recent performance hides the past performance. Additionally, such an analysis does not factor in the risk taken. We believe that higher returns are not possible without taking higher risk. For these reasons, we do not recommend performance analysis on this basis. Instead, we suggest measures which have relatively fewer disadvantages. Here are some of the measures that we suggest: Rolling Returns vis-à-vis benchmark and/or peer group funds. Sharpe Ratio vis-à-vis benchmark and/or peer group funds. Treynor Ratio vis-à-vis peer group funds. Alpha vis-à-vis peer group funds. Information Ratio vis-à-vis all funds. Some things to bear in mind: Each measure will have its advantages and disadvantages. The choice of a measure is a very individual choice based on one s perception of risk and how one perceives the advantages of a measure stacked up against its disadvantages. The selection of the time period, the benchmark and defining the appropriate peer group will have a bearing on the accuracy of some of the measures. The results are best seen, not as individual rankings, but rather as quartiles or similar. If you cannot do these calculations on your own, check for research providers who can do this for you. If you prefer readily available research, look at the methodology followed by different research providers and select one whose methodology gives you most comfort.

9 WHY FRANKLIN TEMPLETON? Franklin Templeton Worldwide: Premier global investment management organization with over 60 years of global investment experience Headquartered in San Mateo, California with offices in 30 countries worldwide Over 500 investment professionals managing USD billion in assets for over 20 million investor accounts (as of 30 June 2012) Global research expertise of over 100 investment professionals Franklin Templeton in India: Established office in 1996 Extensive experience in both equity and debt across market cycles: 9 of our funds have a performance track record of over 10 years Focus on local needs backed by global expertise Our Core Values Our values reflect what's most important to us as a company. They are the ideas that guide how we do business, how we treat our clients and how we work with each other. We strive to: Put clients first We strive to know and meet our clients needs, and we fully accept our fiduciary responsibility to protect the interests of our investors and stakeholders. Build relationships We work to establish enduring relationships with our clients and business partners. We value collaboration and co-operation in our workplaces. Put clients first Build relationships Seek to achieve quality results We value professional excellence and expertise, and we strive to produce consistent, competitive results for our clients. Work with integrity Seek to achieve quality results Work with integrity We speak and act in an honest manner. We believe in being accountable for the impact we have on others.

10 GLOSSARY Alpha: Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund's alpha. Asset: Any holding with monetary value such as stocks, bonds, real estate and cash. Asset Allocation: Investment strategy that diversifies assets among stocks, bonds and money market instruments to help reduce investment risk. Bear Market: A period of time during which securities prices are falling in the stock market. Beta: It shows the sensitivity of the fund to movements measured against the benchmark. A beta of more than 1 indicates an aggressive fund and the value of the fund is likely to rise or fall more than the benchmark. A beta of less than 1 implies a defensive fund that will rise or fall less than the benchmark. A beta of 1 indicates that the fund and the benchmark will react identically. Blue Chip: Stock of a nationally known company that has a long record of profit, growth and dividend payment, and a reputation for quality management, products and services. Bottom-up Investing: In bottom-up investing, the investor focuses his or her attention on a specific company rather than on the industry in which that company operates or on the economy as a whole. Bull Market: A distinctive time period, during which the prices of securities are rising, usually characterized by high trading volumes. Equity: A type of security representing part ownership in a company or corporation. Common stocks, preferred stock and convertible stock are types of equity securities. Fund Manager: The person responsible for deciding which securities are to be part of the mutual fund s portfolio. Growth Investing: A strategy whereby an investor seeks out stocks with what they deem good growth potential. In most cases, a growth stock is defined as a company whose earnings are expected to grow at an above-average rate compared to its industry or the overall market. Information Ratio: The Information ratio is a measure of the risk-adjusted return of a financial security (or asset or portfolio). The expected active return is divided by tracking error, where active return is the difference between the return of the security and the return of a selected benchmark index, and tracking error is the standard deviation of the active return. Market Risk: The potential loss that is possible as a result of short-term volatility of the stock market. Maximum Drawdown: The percentage loss that a fund incurs from its peak NAV to its lowest NAV. Mutual Fund: A mutual fund is an investment that pools shareholders' money and invests it toward a specified goal. Each fund's investments are chosen and monitored by qualified professionals who use this money to create a portfolio. That portfolio could consist of stocks, bonds, money market instruments or a combination of those. Net Asset Value: The NAV is the market value of mutual fund shares. It is calculated each business day, based on the value of the assets of the fund minus its liabilities, divided by the number of shares outstanding. Scheme Information Document (SID): SID is a legal document that contains important information about a fund's investment goals, sales charges, expenses and risks.

11 Performance: How a fund has done in the past and how well it is doing at present. Price-Earnings Ratio (P/E): One of the quantitative measures used by portfolio managers to help them value companies. It is calculated by dividing a company s share price by its earning per share. Rolling Returns: The annualized average return for a period ending with the listed year. Rolling returns are useful for examining the behavior of returns for holding periods similar to those actually experienced by investors. Sharpe Ratio: Statistical measure of a portfolio's historic risk-adjusted performance. Calculated by dividing a fund's excess return by the standard deviation of those returns. As a measure of reward per unit of total risk, the higher the ratio, the better. Standard Deviation: A measure of deviation or historic volatility of a portfolio. It measures the dispersion of a fund's periodic returns from its mean value. The wider the dispersion, the higher the standard deviation and thus higher the risk. Lower standard deviation is therefore preferred. Top-Down Investing: The top-down style of investment management places primary importance on country or regional allocation. Top-down managers generally focus on global economic and political trends in selecting the countries or regions where they expect to find investment opportunities. Treynor Ratio: A ratio developed by Jack Treynor that measures returns earned in excess of that which could have been earned on a riskless investment per each unit of market risk. Value Investing: The investment approach which favors buying under-priced stocks that are inexpensive relative to their intrinsic value and that may have the potential to perform well and increase in price in the future. Mutual Fund investments are subject to market risks, read all scheme related documents carefully. Franklin India Bluechip Fund: Scheme Classification and Investment Objective: An open end growth scheme with an objective primarily to provide medium to long-term capital appreciation. Load Structure: Entry Load: Nil. Exit Load: 1% if redeemed or switched-out within one year of allotment.

12 Franklin Templeton Asset Management (India) Pvt. Ltd. Indiabulls Finance Centre, Tower 2, 12th & 13th Floor, Senapati Bapat Marg, Elphinstone (West), Mumbai Investors: , Distributors: , Mobile phones by prefixing the local city code; local call rates apply for both numbers. Helpline available from 8 a.m. to 9 p.m. Monday to Saturday Join us on: