Growth Equity Product Profile Product Details Strategy Assets $4,064,420,195.71 Inception Date 11/30/2005 Base Currency USD Investment Style Growth Overview We seek to capture the growth potential of India s economy by employing a bottom-up security selection process based on in-depth company research. Through this long-term oriented approach, we focus on identifying high-quality companies that can achieve sustainable growth over time with reasonable valuations. We believe that the quality and thoroughness of our research combined with our flexible yet disciplined approach to investing in Indian equities offer the potential for strong returns in any investment climate. Performance Data Average Annual Total Returns (USD %) 1 Since Inception 3 Mths YTD 1 Yr 3 Yrs 5 Yrs 10 Yrs (11/30/2005) Franklin India Equity -7.12-7.12 9.06 7.09 13.52 8.45 13.26 Composite - GROSS Franklin India Equity -7.35-7.35 8.04 6.09 12.46 7.13 11.78 Composite - NET -6.95-6.95 10.23 4.26 7.87 2.96 8.71 Nifty 500-7.81-7.81 12.37 8.30 12.15 4.89 10.14 20% 10% 0% 12.37 9.06 10.23 8.04 7.09 8.30 6.09 4.26 13.52 12.46 12.15 7.87 8.45 7.13 2.96 4.89 13.26 11.78 8.71 10.14-10% -7.12-7.35-6.95-7.81-7.12-7.35-6.95-7.81 3 Mths YTD 1 Yr 3 Yrs 5 Yrs 10 Yrs Since Inception Franklin India Equity Composite - GROSS Franklin India Equity Composite - NET Nifty 500 Calendar Year Returns (USD %) 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 Franklin India 40.55 3.82-3.63 44.26-3.18 24.78-30.15 29.73 84.09-55.20 Equity Composite - GROSS Franklin India 39.27 2.84-4.54 42.96-4.12 23.59-31.46 27.48 81.24-55.89 Equity Composite - NET 38.76-1.43-6.12 23.87-3.83 25.97-37.17 20.95 102.81-64.63 Nifty 500 46.37 2.47-4.37 36.50-6.70 29.91-37.85 19.96 99.93-64.84 Portfolio Manager Insight Market Review Indian equities fell over the first quarter and underperformed broader emerging markets, despite having a strong start to 2018 amidst foreign investor flows and a solid global economic backdrop. Volatility increased in equity markets on global concerns about faster-than-expected monetary policy tightening, particularly in the United States. Furthermore, several local factors hindered the market, including announcements of increased fiscal deficit targets, the restoration of a long-term capital gains tax on equities, and a fraud scandal concerning a public-sector bank. Political uncertainty rose as the Telugu Desam Party left the coalition National Democratic Alliance government. 1. Periods of more than one year are annualized. Past performance is not an indicator or a guarantee of future performance.
However, India s gross domestic product (GDP) grew 7.2% year-on-year in the final quarter of 2017, above market expectations and also higher than the previous quarter s figure. During the first quarter, the Reserve Bank of India maintained its benchmark interest rate at 6%, with a neutral policy stance. The rupee retreated against the US dollar over the quarter. Performance Review The strategy declined over the first quarter and underperformed the benchmark index. In relative terms, an underweight to information technology detracted the most, followed by an overweight and stock selection in telecommunication services. Stock selection amongst industrials also detracted. Conversely, stock selection in consumer discretionary contributed. Additionally, stock selection and an underweight to healthcare aided returns, as did exposure to real estate. In absolute terms, financials, materials and telecommunication services detracted the most. Only information technology and real estate contributed somewhat. Outlook & Strategy India s aggregate domestic demand growth trend remains encouraging. Investment indicators have also seen positive development, and we believe that the transmission of domestic demand into corporate earnings has strengthened. The corporate capital expenditure (capex) cycle presently shows a nascent recovery of improving domestic demand and better capacity utilisation levels across industries. Government spending continues to grow steadily, though is subject to budgetary constraints. However, capex in construction remains slow. With some segments of the capex cycle indicating reasonable growth, the likelihood increases of an improvement in earnings growth for the fiscal year ending March 2019. While micro-level indicators (such as corporate earnings) continue to strengthen, the macroeconomic fundamentals remain incrementally weak. The fiscal deficit for April 2017 to February 2018 is higher than projected in the Union Budget, raising the risk of fiscal slippage beyond the revised estimate of 3.5% of GDP for the fiscal year 2018. The widening of the current account deficit, led by a surge in the trade deficit, may be attributed to higher oil imports coupled with rising oil prices. Rising global commodity prices pose a risk to the domestic deficit and inflation. Further, inflationary pressures in developed economies, emanating from tighter labour markets and the possibility of a greater-than-expected rise in wages, could increase market volatility. Curbs on imports may also engender inflationary pressures in the United States. An increase in US bond yields could hamper the ability of emerging market (EM) corporations to service their debt, which could weigh on EM equities. On the positive side, however, domestic growth continues to recover, buoyed by strengthening microeconomic indicators that attempt to offset the weakness in macroeconomic gauges as well as global challenges. An escalation in the ongoing global trade conflict is likely to have a limited impact on India since it is a small trade partner for the United States. India s US-bound exports account for 3% of India s GDP. We expect the Indian equity market to be driven by a strong earnings recovery. We believe that our bottom-up focus on high-quality businesses that convert earnings into cash flows will help us navigate through volatile market conditions over the next 12 months. Portfolio Characteristics Portfolio Price to Earnings (12 Month Trailing) 29.59x 21.60x Price to Book Value 3.42x 3.09x Price to Cash Flow 13.82x 13.43x Market Capitalization (Millions in USD) 21,830 60,202 Number of Issuers 2 51 - Price to Earnings Growth Ratio 1.20x 1.20x Historical 3-Year EPS Growth 5.58% 10.91% Estimated 3-5 Yr EPS Growth 19.23% 17.06% Price to Earnings (12 Month Forward) 27.99x 20.62x Number of issuers based on a representative portfolio in the composite. Securities will vary among individual accounts in the composite 2. Based on a representative portfolio in the composite. Securities will vary among individual accounts in the composite. ftinstitutional.com 2
Portfolio Diversification Sector Weightings vs. 3 Percent of Total Financials 31.97 23.74 Consumer Discretionary 17.60 12.22 Industrials 12.03 6.02 Materials 10.83 9.36 Information Technology 8.74 15.59 Consumer Staples 6.49 9.74 Telecommunication Services 4.68 2.81 Health Care 3.83 5.36 Real Estate 2.55 Utilities 2.03 Energy 13.12 Cash & Cash Equivalents 1.28 0% 5% 10% 15% 20% 25% 30% 35% 40% Top Ten Holdings 4 Percent of Total Top Holdings Sector % HDFC BANK Banks 8.40 INFOSYS Software & Services 7.12 KOTAK MAHINDRA Banks 7.01 BANK TATA MOTORS Automobiles & 4.20 Components YES BANK Banks 4.09 ULTRATECH CEMENT Materials 3.78 LARSEN & TOUBRO Capital Goods 3.69 HINDUSTAN UNILEVER Household & Personal 3.45 Products TITAN CO Consumer Durables & 3.44 Apparel STATE BANK OF INDIA Banks 3.31 Franklin India Equity Composite Supplemental Performance Statistics 3 Yrs 5 Yrs 10 Yrs Since Inception Standard Deviation (%) Franklin India Equity Composite 16.84 18.74 25.53 25.63 16.76 17.81 28.93 28.90 Tracking Error (%) 5.10 5.32 6.71 6.45 Information Ratio 7 0.55 1.06 0.82 0.71 Beta 0.96 1.01 0.86 0.87 Sharpe Ratio Franklin India Equity Composite 0.39 0.70 0.32 0.48 0.22 0.42 0.09 0.26 Investment Philosophy We view our primary strengths as the Franklin India Equity team s presence on the ground and in-depth approach to fundamental research, its expertise in India equity investing, its investment process and its ability to think independently. Our bottom-up approach to investing is focused on the fundamental analysis of individual companies, based on internal research. It is the foundation of our investment process, aimed at identifying and selecting companies that combine growth, quality and sustainability characteristics at a sensible price. 5. Risk statistics are calculated using gross of fees composite performance. 6. Beta, Information Ratio and Tracking Error information are measured against the. ftinstitutional.com 3
Stock Selection Philosophy Growth Quality Sustainability of Results Use of financial analysis to evaluate: Capital return and management analysis to determine: Analysis of a company s long-term ability to: potential to generate positive cash flows or company management s strategic thinking and sustain its competitive product/service earnings that appear to be increasing at a rate faster than that of the industry/economy execution abilities integrity, depth, capital allocation and corporate brand/cost advantage create sustainable shareholder value profitable reinvestment opportunities governance standards potential to sustain high return on capital in the long term Investment Process 1. Develop Universe 2. Fundamental Research 3. Valuations 4. Stock Recommendations 5. Portfolio Construction Shortlist companies from the universe of over 5,500 companies. Identify companies with sound business models, strong growth opportunities, sustainable competitive advantages, and quality management. 360-degree, in-depth analysis based on regular interactions with management, employees, customers, competitors & independent industry professionals as well as study reports/news. Financial Analysis and forecasts. Flexible approach use suitable valuation tools depending on the industry & market situation. Focus on the long-term strategic view in the valuation approach. Conduct rigorous team discussion and debate between analysts and managers on potential companies entry onto a buy, hold or sell list. Stocks rated buy, sell or hold based on growth, quality and valuation. Model Portfolio constructed from the analysts buy and hold lists. Final Portfolio: Security sizing determined by stock conviction as well as risk alignment. Portfolio Manager has discretion over exposure to stocks outside the model portfolio. Investment Team Franklin India Equity Management Team Years with Firm Years Experience Stephen Dover, CFA 20 34 Sukumar Rajah 23 27 Purav Jhaveri, CFA 18 24 Anand Radhakrishnan, CFA 13 24 Murali Yerram 10 10 Additional Resources Global Portfolio Compliance Global Trading Platform Investment Risk Management Group ftinstitutional.com 4
Important Legal Information Franklin claims compliance with the Global Investment Performance Standards (GIPS ). Franklin (the firm ) encompasses the equity, fixed income and balanced accounts managed by Franklin Advisers, Inc., and related Franklin affiliates, including, effective 1 January 2007, the equity accounts managed by the institutional investment teams of Franklin Templeton Institutional, LLC under the former firm name of Fiduciary Global Advisors. The combined equity assets of Franklin and Fiduciary Global Advisors form the Franklin Equity Group (formerly Franklin Global Advisers prior to 30 June 2010) unit of Franklin. Effective 1 January 2006, the fixed income assets managed from that date forward by Franklin Templeton Institutional, LLC ( FTI ) or its related affiliates (managed previously by Fiduciary Trust Company International - Institutional Division or FTCI s Institutional Division ) that went through the institutional portfolio review process were combined with the fixed income assets of Franklin to form the Franklin Templeton Fixed Income unit of Franklin. The primary reason for these changes to the firm definition was to consolidate equity and fixed income asset management for Franklin (as previously defined), Fiduciary Global Advisors (institutional equities) and FTCI s Institutional Division (institutional fixed income) under one firm, Franklin. The firm definition for Franklin does not include multi-strategy asset allocation portfolios managed by Franklin Templeton Multi-Asset Solutions (FTMAS), which was previously known as Franklin Templeton Solutions as well as Franklin Templeton Multi-Asset Strategies and the wrap-fee and non-wrap-fee accounts managed by Franklin Separately Managed Accounts (formerly Franklin Portfolio Advisors) or Franklin Europe which integrated into the Templeton firm definition effective 1 December 2017. The Franklin India Equity Composite consists of all portfolios managed on a fully discretionary basis with an investment objective that seeks capital appreciation by investing in small, mid or large cap companies which have their principal business activities in India. From composite inception to the present, the Franklin India Equity Composite includes accounts that are managed by Franklin Advisers, Inc (FAI) and sub-advised to Franklin Templeton Asset Management (India) Pvt. (FTAMI). All accounts in the composite are managed on a discretionary basis by Franklin Advisers, Inc., part of the firm Franklin. FTAMI provides non-binding, non-discretionary advice to FAI, in connection with FAI s management of the Franklin India Equity strategy. FTAMI is a separate firm which does not claim GIPS compliance. Total returns are presented in U.S. dollars both gross and net of investment advisory fees, are inclusive of commissions and transaction costs, and assume reinvestment of any dividends, interest income, capital gains, or other earnings. Periods greater than one year are shown as average annual total returns. Performance data is shown rounded to the nearest hundredth. Past performance is not an indicator or a guarantee of future performance. The (USD-based) is a free float-adjusted market capitalization weighted equity index denominated in U.S. dollars comprised of securities in the emerging market of India. The benchmark is used for comparative purposes only and is provided to represent the investment environment existing during the time periods shown. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. To receive a complete list and description of Franklin composites (including any single account mutual fund composite) and/or a presentation that adheres to the GIPS standards for any composite, contact your Franklin Templeton institutional representative at (800) 321-8563. Intended for Recipient only. FTI has provided these materials to you with the understanding that you have or control more than $50 million in assets under management (if this is not correct please let FTI promptly know). FTI is not undertaking to provide impartial advice. Nothing herein is intended to provide fiduciary advice. FTI has a financial interest. CFA and Chartered Financial Analyst are trademarks owned by CFA Institute. MSCI makes no warranties and shall have no liability with respect to any MSCI data reproduced herein. No further redistribution or use is permitted. This report is not prepared or endorsed by MSCI. Standard & Poor s, S&P and S&P 500 are registered trademarks of Standard & Poor s Financial Services LLC. Important data provider notices and terms available at www.franklintempletondatasources.com. 3. Information is historical and may not reflect current or future portfolio characteristics. Percentage may not equal 100% due to rounding. All holdings are subject to change. 4. Holdings of the same issuers have been combined. Top ten holdings information is historical and may not reflect current or future portfolio characteristics. All holdings are subject to change. 7. Information Ratio is a way to evaluate a manager s ability to outperform a benchmark in relation to the risk that manager is assuming, with risk defined as deviation from the benchmark. This measure is calculated by dividing the portfolio s excess return (portfolio return less the benchmark return) by the tracking error (derived by taking the standard deviation of the monthly differences between the portfolio return and the benchmark return over time). This piece is intended for institutional investment management consultants or investors interested in institutional products and services available through Franklin Templeton Institutional and its affiliates. Various account minimums or other eligibility qualifications apply depending on the investment strategy or vehicle. Franklin Templeton Institutional One Franklin Parkway San Mateo, CA 94403-1906 Tel: (800) 321-8563 ftinstitutional.com 2018 Franklin Templeton Investments. All rights reserved.