After a tremendous rally over the last few years, Small caps have finally entered the list of laggards. The S&P BSE Small Cap index has lost about 23% in value (as calculated on 25th July 2018) from its peak in January 2018.
This makes the claim stronger that small caps are not every ones cup of tea. It really needs expertise to identify the right bets in the small cap space or else one may soon find himself on the back foot, with substantial loss in capital.
Small cap universe being fairly under researched, the stocks in this space tend to easily lose sentiment and are hit harder in difficult economic conditions. Moreover, the perception that a slowdown will hit the earnings of small sized companies more even puts a question mark on their survival. On the other hand, larger companies have a much better chance of surviving in difficult times.
However, small caps have the ability to steal the show when the stock market's rebound for a longer rally. But one surely needs to select right and quality small cap stocks, as not every small cap stock may turn out to be multi-bagger. The costs of going wrong may be extremely higher.
Mutual funds focusing on small-caps may be an ideal choice for retail investors who would like to explore the money making potential in this space, although at a higher risk level. Even though the number of funds in the small cap category is small, each has their own pros and cons.
Franklin India Smaller Companies Fund is one such fund with a mandate to invest in stocks of small sized companies. Positioned as a predominant small cap fund, the fund primarily focuses on investing predominantly in small cap companies. However, it has been investing predominantly in small caps and mid-caps along with a nominal investment into large caps.
The strong investment processes, astute stock picking and sound risk management systems followed at Franklin Templeton Mutual Fund have contributed to the stability in its performance across market conditions. The popularity of the fund can be known from its size of over Rs 7,000 crore, which is huge for a typical small cap fund. No wonders, it is currently the largest fund in the small cap funds category.
Investment Objective of Franklin India Smaller Companies Fund
Franklin India Smaller Companies Fund holds an objective of providing long-term capital appreciation by investing in small cap companies.
Fund Details: Franklin India Smaller Companies Fund
Fund Facts
| Category |
Small cap Fund |
Style |
Growth |
| Type |
Open ended scheme |
Market Cap Bias |
Small Cap Fund |
| Launch Date |
13-Jan-06 |
SI Return (CAGR) |
14.75% |
| Corpus (Cr) |
Rs 7,114 |
Min./Add. Inv. |
Rs 5,000 / Rs 1,000 |
| Expense Ratio (Dir/Reg) |
0.9% / 2.15% |
Exit Load |
1% |
Portfolio Data as on June 30, 2018.
SI Return as on July 24, 2018.
(Source: ACE MF)
Franklin India Smaller Companies Fund is mandated to invest– –
-
65% - 100% in equities and equity linked instruments of Smaller Companies
-
0% - 35% in equities and equity linked instruments of other Companies
-
0% - 35% in debt and money market instruments
SEBI has defined small caps as stock of companies beyond the 250th company on full market capitalisation basis.
Growth Of Rs 10,000, If Invested In Franklin India Smaller Companies Fund 5 Years Ago
Data as on July 24, 2018
(Source: ACE MF)
The historical 5 year performance of Franklin India Smaller Companies Fund shows that Rs 10,000 invested in the fund 5 years back, would now have appreciated to Rs 34,850. A simultaneous investment of Rs 10,000 in the benchmark Nifty Smallcap 250 – TRI index would have grown to Rs 29,269. With a CAGR of around 28%, Franklin India Smaller Companies Fund has outpaced its benchmark by a significant margin and has generated an alpha of 4% over its benchmark (24% CAGR).
Franklin India Smaller Companies Fund: Year-on-Year Performance
YTD as on July 24, 2018
(Source: ACE MF)
Launcehd way back in January 2006, Franklin India Smaller Companies Fund has a track record of over a decade. The fund has not been a solid bull market performer, but it has made its presence felt during the years of crisis. The year-on-year performance comparison of the fund vis-à-vis its benchmark shows that the fund has outperformed the benchmark in 8 out of the last 10 calendar years. Both its underperformance came during the years when the small caps registered a substantial rally.
Franklin India Smaller Companies Fund: Performance Vis-à-vis Category Peers
Rolling Period Returns
Returns are on a rolling basis and those depicted over 1-Yr are compounded annualised.
Data as on July 24, 2018
(Source: ACE MF)
*Please note, this table only represents the best performing funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.
Franklin India Smaller Companies Fund has been an average performer. Although the fund has managed to beat the benchmark over longer time period, it is not a big return generator when compared to the kind of returns delivered by its other small cap peers. However, its ability to limit the downside during gloomy and uncertain market conditions is something that differentiates the fund from the rest. Against a 23% fall in the S&P BSE Small cap index in the last 6 months (15-Jan-2018 to 25-July-2018), the fund is down about 12%. Franklin India Smaller Companies Fund possesses the lowest standard deviation in the category, which confirms its penchant towards risk management over returns. The lower risk taken by the fund has helped it outperform many of its peers in terms of risk-adjusted returns.
Investment Strategy of Franklin India Smaller Companies Fund
Having a mandate to invest in small-cap stocks, Franklin India Smaller Companies Fund aims to identify companies that have the potential to become future leaders. The fund is mandated to invest 65%-100% of its assets into equities of small cap companies, while 0-35% in other companies. Historically, the fund has not limited its exposure to only small caps, but has carried significant allocation to mid caps as well, along with up to 15% allocation towards large caps. Despite being a small cap fund, it has operated more like a mid and small cap contender. While the conservative strategies cost the fund during bull market rallies, it has definitely helped keep its risk under check and turned out to be rewarding during bear market phases. However, with the new definition kicking in, the fund is expected to raise its allocation in small caps to at least 65% of its assets.
In terms of stock picking, Franklin India Smaller Companies Fund is driven by processes and depends predominantly on bottom up approach to pick quality stocks for its portfolio. While managing the portfolio, the fund managers follow an active investment strategy taking defensive/aggressive postures in smaller companies depending on the opportunities available at various points in time. Franklin Templeton as a fund house gives high weightage to risk management over return generation. It is not a bull market fund house, but is known to stand out during bear market phases.
Franklin India Smaller Companies Fund - Portfolio Allocation and Market Capitalisation Trends
Holdings (in %) as on June 30, 2018
(Source: ACEMF)
Despite being a small cap fund, the portfolio of Franklin India Smaller Companies Fund has been diversified across marekt caps. Along with small caps, it has held significant allocation to mid caps. The large cap holdings in its portfolio has been limited to about 15% of its assets. However, post implementation of recategorization norms, the fund managers have been gradually shifting the weigtage towards small caps, while cutting down the exposure to mid caps.
As on June 30, 2018, the fund held an exposure of 36.8% in small-caps, 40.3% in mid -caps and about 14.9% in large caps. Notably, in the beginning of the year, the mid cap allocation in the fund's portfolio was about 55%, while small caps was just around 23% of its assets.
Franklin India Smaller Companies Fund – Top Portfolio Holdings
Top 10 Stocks
| Stocks |
% of Assets |
| Finolex Cables Ltd. |
3.31 |
| Vardhman Textiles Ltd. |
2.84 |
| HDFC Bank Ltd. |
2.66 |
| Repco Home Finance Ltd. |
2.59 |
| eClerx Services Ltd. |
2.38 |
| Infosys Ltd. |
2.28 |
| Cyient Ltd. |
2.10 |
| Nesco Ltd. |
2.05 |
| Karur Vysya Bank Ltd. |
2.01 |
| Dr. Lal Pathlabs Ltd. |
1.99 |
|
Top 5 Sectors
|
| Holdings (in %) as on June 30, 2018 (Source: ACEMF) |
Franklin India Smaller Companies Fund holds a well-diversified portfolio of about 65-75 stocks. The fund makes well use of diversification for risk management. Moreover the large size of the fund is another factor that has enforced the increase in number of tail-enders in the portfolio. About 21 out of 72 stocks in its portfolio have a weightage of less than 1%.
Among stocks Finolex Cables, Vardhman Textiles, HDFC Bank, Repco Home Finance and eClerx Services appear in the list of top 5 holdings in its portfolio. The existence of large cap names like HDFC Bank and Infosys in the portfolio is an eyebrow raiser for investors who have been investing in the fund for the thirst of small caps. It is to be seen, if the fund managers will do away with such large names to make it a true to mandate small cap fund in the new categorization era.
Construction, Banks, Financials, Software and Engineering dominate the fund’s portfolio at present, together accounting for about 42% of its assets. Consumption, Chemicals, Media and Pharma are amongst the next top bets in the funds portfolio with a weightage of 3% to 5%.
Suitability of Franklin India Smaller Companies Fund
While small cap funds have the ability to earn higher returns, on the flip side they carry greater potential of loss as well. This feature makes small cap fund suitable only for very aggressive investors seeking to boost their portfolio with extra-ordinary returns generated by small caps. Eyeing for long term wealth creation, one should have an investment horizon of at least, while investing in small cap funds.
Unlike its small cap peers, Franklin India Smaller Companies Fund is inclined more towards risk management rather than return generation. Strong investment processes, astute stock picking and sound risk management systems have contributed to the performance of the fund. Being a cautiously managed small cap fund, Franklin India Smaller Companies Fund is suitable for investors looking for long term wealth creation through small caps, but with some element of stability. This fund may not be the best bet for those anticipating extra-ordinary return potential of small caps.
Note: This write up is for information purpose and not a recommendation to buy or sell the mutual fund scheme. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your financial planner or investment advisor.
|
Editor's note:
Earlier this month, we launched our most ambitious project till date, PersonalFN Direct.
PersonalFN Direct, is a state of the art Robo Advisor, backed by over 18 years of our research expertise and the best of technology.
We are sure you know that Robo Advisory is the next big thing… After all, you are a Smart and informed Investor!
Here is your chance to beat your contemporaries in the race of life .
Click Here To Sign Up to PersonalFN Direct right now.
|
DISCLOSURE AS PER SECURITIES AND EXCHANGE BOARD OF INDIA (RESEARCH ANALYSTS) REGULATIONS, 2014
About the Company including business activity
Quantum Information Services Private Limited (QIS) was incorporated on December 19, 1989.
QIS was promoted by Mr. Ajit Dayal with an objective of providing value-based information / views on news related to equity markets, the economy in general, sector analysis, budget review and various personal products and investments options available to the Public. It was the first company to start equity research on an institutional level.
'PersonalFN' is a service brand of QIS and was started in the year 1999. In 1999, the Company registered the Domain name www.personalfn.com for providing information on mutual funds and personal financial planning, financial markets in general, etc and services related to financial planning and research in various financial instruments including mutual funds, insurance and fixed income products to customers. It offers asset allocation and researched investment recommendations through its financial planning services.
Quantum Information Services Private Limited (QIS) is registered as Investment Adviser under SEBI (Investment Adviser) Regulations, 2013 and having Registration No.: INA000000680. In terms of second proviso to Regulation 3 (1) of SEBI (Research Analysts) Regulations, 2014 the Company is not required to obtain Certificate of registration from SEBI.
Disciplinary history
There are no outstanding litigations against the Company, it subsidiaries and its Directors.
and condition on which its offer research report. For the terms and condition for research report click here.
Details of associates
- Money Simplified Services Private Limited;
- PersonalFN Insurance Services India Private Limited;
- Equitymaster Agora Research Private Limited;
- Common Sense Living Private Limited;
- Quantum Advisors Private Limited;
- Quantum Asset Management Company Private Limited;
- HelpYourNGO Private Limited;
- HelpYourNGO Foundation;
- Natural Streets for Performing Arts Foundation;
- Primary Real Estate Advisors Private Limited;
- Rahul Goel;
- I V Subramaniam.
Disclosure with regard to ownership and material conflicts of interest
- Neither QIS, it’s Associates, Research Analyst or his/her relative have any financial interest in the subject Company , except QIS receives fees for providing research to Quantum Equity Fund of Fund (QEFoF) which is Fund of Fund scheme managed by QMF.
- Neither QIS, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one per cent or more securities of the subject Company, at the end of the month immediately preceding the date of publication of the research report.
- Neither QIS, it's Associates, Research Analyst or his/her relative has any other material conflict of interest at the time of publication of the research report except that QIS (PersonalFN) is, as per SEBI (Mutual Funds) Regulations 1996, an associate / group Company of Quantum Asset Management Company Private Limited and Trustees and Sponsor of Quantum Mutual Fund (QMF) and to that extent there may be conflict of interest while recommending any schemes of QMF. However any such recommendation or reference made is based on the standard evaluation and selection process, which applies uniformly for all Mutual Fund Schemes. The payment of commission (upfront /annualized & trail), if any, for any Schemes by QMF to QIS (PersonalFN) is also at arm's length and as per prevailing market practices
Disclosure with regard to receipt of Compensation
- Neither QIS nor it's Associates have any compensation from the subject Company in the past twelve months.
- Neither QIS nor it's Associates have managed or co-managed public offering of securities for the subject Company in the past twelve months.
- Neither QIS nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject Company in the past twelve months.
- Neither QIS nor it’s Associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months except from Axis Bank Limited under a service agreement.
- Neither QIS nor it's Associates have received any compensation or other benefits from the subject Company or third party in connection with the research report
General disclosure
- The Research Analyst has not served as an officer, director or employee of the subject Company.
- QIS or the Research Analyst has not been engaged in market making activity for the subject Company.
Subject Company means Mutual Fund Schemes
Quantum Information Services Private Limited CIN: U65990MH1989PTC054667 Regd. Office: 103, Regent Chambers, 1st Floor, Nariman Point, Mumbai - 400 021 Corp. Office: 103, Regent Chambers, 1st Floor, Nariman Point, Mumbai - 400 021. Email: info@personalfn.com Website: www.personalfn.com Tel.: 022 61361200 Fax.: 022 61361222
SEBI-registered Investment Adviser. Registration No. INA000000680, SEBI (Investment Advisers) Regulation, 2013
Add Comments