FUND COMPARISON: Franklin India Prima & Reliance Growth

If we believe that tomorrow will be better, we can bear a hardship today.

There’s something affirming in a cliché. And investors in Franklin India Prima will empathise with this one. Right now, they are flooding us with queries on whether it makes sense to stay put or get out because tomorrow may not be better.

In case you have not noticed, Prima has taken a beating on the performance front. From being the best performer it has slipped to abysmal levels. And its investors are a worried lot.

What’s causing eyebrows to be raised is that its peer – Reliance Growth – is going great guns. This clearly indicates that the issue is not so much whether mid-caps as a whole are floundering but rather a fund-specific problem.

If you feel that a comparison between Franklin India Prima and Reliance Growth is a dubious approach, consider this.

The two funds have an identical bent- diversified equity with a mid-cap bias.

They are strikingly similar in terms of tenure – both have been around for more than a decade and grapple with a huge amount of assets. They are the largest mid-cap funds. And the clinching factor is that they shared virtually identical NAVs in January 2005 – a difference of just 1.7. But that did not last for long. Since then, growth has soared on the performance and ranking front and Prima has not been able to keep pace. Despite sharing much common ground, they have followed very divergent paths.

When both these funds jostled for the top slot a few years ago, they managed to garner plenty of assets. With mid-cap funds, size is an issue. The bigger the size, the more difficult it is for the fund manager to take aggressive positions in small stocks. His ability to speedily get in and out gets diluted with increasing size.

Prima and Growth have had to contend with this issue and both fund managers must be commended for their handling.

Unlike other funds, they have not held phenomenally high positions in cash. Neither have they taken diversification to the extreme by flooding the portfolios with stocks. Since January 2005, Growth has had an average of 40 stocks in its portfolio while the corresponding figure for Prima is 55.

What’s interesting is that Growth, with a larger asset base, not only managed to hold fewer stocks than Prima but also delivered superior results. But the key differentiating factor between the two is not in the assets or number of stocks held but rather in their strategy and stock picking.

The Franklin Templeton group tends to portray itself as style agnostic. So t refrain from being classified as aggressive or conservative or growth-oriented investor. It likes to keep it simple - buy on sound fundamentals and sell when the target price is achieved.

The perception of Reliance, on the other hand, is that of opportunistic investors who have no qualms about getting out of a stock, booking profits and re-entering at a later date. While this might have been the case earlier, it does not necessarily hold true now.

A look at the portfolios between January 2005 and May 2007 revealed that Prima held on to 18 stocks for a period of more than 24 months while Growth was not too far behind at 13.

Where Growth tends to score is in its ability to adapt to market movements. In a rapid bull run, they will look at growth stocks, not value. In a slower market, they will change their stance. This flexibility is extended even in the preference for market cap.

If the need be, Growth will increase its large-cap substantially. For instance, in February 2006, 39.2 per cent of the equity allocation was in large-caps. Prima, by-and-large, has refrained from having too high an allocation to large caps and has touched 19.66 per cent (November 2005).

Reliance Growth is known as a pro-active fund that regularly churns out fresh ideas - a benefit from having their in-house research team. In January 2005, when the two funds’ NAV was almost overlapping, they had six common stocks. Come May 2007 and the common stock is just one – Jai Prakash Associates.

Prima once known for its smart stock picking has tended to lag behind. Prima missed out on the sugar sector where short-term trading opportunities were available. But stocks like Balrampur Chini, Dhampur Sugar Mills, Mawana Sugars and Oudh Sugar Mills featured in the 2005 and early 2006 monthly portfolios of Growth.

Reliance Growth picked up steel stocks more than two years ago - JSW Steel, Jindal Saw, and Jindal Steel & Power – and that has paid off well.

Reliance Growth has avoided real estate stocks but invested in Bombay Dyeing (indirect exposure to real estate) and Jai Prakash. While the latter is also owned by Prima, Ansal Properties & Infrastruture was bought when it was quoting at a steep rate in January 2007 and since then the price of that stock has fallen.

Don’t give up on Prima just yet. The fund house is making changes that should help boost performance What holds Prima in good stead is a fine fund manager.

Despite hitting a low, there is nothing stopping him from bouncing back. Looking at the pedigree of both fund managers, it is probably right to say that one is not better than the other.

Just that one has made fewer mistakes and better picks. Though ultimately, that is what fund management is all about.



UTI Infrastructure - A strong performance since inception makes this fund a worthy choice

UTI Infrastructure has performed exceedingly well in the first three years of its existence. The first of the infrastructure funds to be launched, it has generated phenomenal returns, riding upon the big ticket capital spends happening in the country. In that sense, UTI spotted the opportunity at the right time to come out with such a fund, and many others followed suit.

The fund ranked in the top quartile of the category in 2005, generating 57 per cent returns to better an average peer by a margin of more than 10 per cent. Calendar year 2006 was even better, when the fund added to its glory by taking the top slot. Its returns of 61.48 per cent ranked it first in the category. This year as well, the fund has so far managed to stay slightly ahead of the category, despite hitting a rough patch in the first quarter, when industries like real estate and cement corrected sharply.

As a result of its superior performance, the fund has attracted a lot of investor attention, and its asset size has shot up from under Rs 60 crore at the time of its launch in April 2004 to Rs 1,000 crore at present.

Though the fund has spread its assets across stocks of different market capitalisation, it has developed a bias for large-caps in recent times. At the end of May 2007, stocks of large companies accounted for 57 per cent of its assets. It invests in a reasonably diversified portfolio of around 40 stocks.

Reliance Industries is the top holding of the fund (7.03 per cent) followed by Larsen and Toubro (6.03 per cent), BHEL (5.6 per cent), ONGC (3.69 per cent) and Reliance Communications (3.54 per cent). Among the sectors, the likes of engineering, construction and energy obviously dominate the portfolio, but the fund also has significant exposure to metals and technology. These five sectors account for over three-fourth of the fund’s investments.

If you want to take a bet on the capital expenditure wave sweeping across the country, then this fund could be a worthy choice considering its strong performance since inception.




DSP Merrill Lynch Tiger - This predominantly large-cap fund has earned great returns for investors

An acronym for The Infrastructure Growth and Economic Reforms, DSPML TIGER. focuses on sectors that are likely to prosper from growth related to economic reforms and infrastructure development. With this as a starting point, the fund manager follows a top-down approach (for sector selection) before resorting to bottom-up stock picking.

Despite platitudes about how you can never time the market, a perfect launch timing does wonders for the perception of a mutual fund. And T.I.G.E.R is a prime example. Launched three years ago, the fund capitalised on the infrastructure run. But unlike other infrastructure offerings, its broader mandate has enabled it to tap into sectors that core infrastructure funds do not – healthcare, FMCG, textiles, consumer non-durables.

The portfolio is, probably, too well diversified and this year averaged at around 66 stocks. RIL, the largest holding, is currently at less than 6 per cent and the rest are all below 4 per cent. One can expect such diversification from a mid-cap fund, but this is surprising from a predominantly large-cap offering. Nevertheless, its tilt towards growth investing has enabled it to deliver superior returns.

Looking at the fund’s three-year tenure, its most prominent holding – RIL – has been there since inception, while around 20 stocks have been held continuously for at least 30 months. But when looked in perspective of the 60-odd stocks in the portfolio, it is not significant enough to conclude that the manager adheres to a buy-and-hold strategy. In fact, on the other end of the spectrum are 48 stocks that have stayed on for six months or less. Jet Airways was one stock that played hide-and-seek with the portfolio by appearing, disappearing and appearing again before making an exit. A look at the rankings, as on June 15, 2007, shows the fund in a very favourable light. It has been the best performing diversified equity fund in the two-year category over the past three weeks’ ranking and a top quartile performer in the one- and three-year category. And considering its broad and well-timed investment mandate, it won’t run out of good ideas.