SENIOR VICE PRESIDENT & PORTFOLIO MANAGER. FRANKLIN TEMPLETON INDIA
Fund Manager Interview
MR. JANAKIRAMAN RENGARAJU
Mr. Janakiraman Rengaraju is Vice President & Portfolio Manager – Equities for Franklin Templeton India AMC Ltd. Mr. Rengaraju manages Franklin India Prima Fund, Franklin India Opportunities Fund and Franklin India Smaller Companies Fund. He is co-portfolio manager for Franklin India Equity Advantage Fund, Franklin India Equity Fund and Franklin India Taxshield.
Mr. Rengaraju has been in the investment management Industry since 1997. He started his career with Franklin Templeton in 2007. Prior to joining Franklin Templeton, he was managing the investment corpus of Indian Syntans Group, a Chennai based privately held group of companies. Before this, he worked for UTI Securities, Mumbai.
Mr. Rengaraju earned his Post Graduate Diploma in Management from Indian Institute of Management, Bangalore in 1995. He earned his Bachelor of Engineering from Govt. College of Tech., Coimbatore in 1992. He is also a Chartered Financial Analyst (CFA) Charterholder.
Answer : As major global economies face concerns of slowdown and recessionary fears, India continues to stand out in terms of relative macroeconomic stability. Various parameters including current account and fiscal situation, forex reserves, inflation levels continue to remain manageable. Additionally, strength in financial sector and banking sector balance sheets, support from policy reforms and the improving trinity of government spending, private sector capex and household capex add to a resilient growth outlook. This is reflected in the recent GDP growth numbers. India’s weight in global emerging market index has risen from single digits in early 2000s to 15% in March 2023, reiterating the importance of India exposure in global scheme of things. On account of growth potential, India valuations continue to trend at a premium versus MSCI emerging market index. Some moderation in valuation levels has occurred from October 2022 peak. Structural strength, positive growth outlook and relatively reasonable valuations potential make India a robust long term investment destination versus peers.
Answer : We have an institutionalized process for stock selection which follows a Q-G-S-V model. This expands to Quality, Growth, Sustainability and Valuation. The universe of stocks is screened based on the Q-G-S-V metrics. Stocks could be selected for the portfolio on the basis of their score in these metrics. However, the ideal combination of high Growth, high Quality, good Sustainability of earnings and reasonable Valuations may not always be available for stock selection. For example, a long-term high growth business trading at a higher valuation multiple might still be considered on account of the valuation justification coming in the form of sustainable long term high growth. A good quality business with sustainable long term growth trading at very cheap valuation levels, but not a very high growth expectation may also make it to the portfolio on account of the wider margin of safety it potentially offers. Along with these critical metrics, there is an overlay of Environmental-Social-Governance (ESG) factors which is integrated into the overall stock selection process.
Answer : After peaking in January 2022, the domestic tech sector index has mostly moved in a range, mirroring trends in the global tech sector. With the slowdown in global spending hitting the domestic tech sector, the tailwinds from lower subcontracting expenses and depreciation of INR vs USD, seen during1Q-3QFY23, have diminished in Q4FY23. The cashflows have either declined or remained flat for many IT services companies in FY23. Management commentary has called out a cautious demand outlook in the near term. That said, segments of the technology sector continue to offer growth potential. Post the correction seen in the new age technology disruptors over the past year or so, valuations have moderated. More importantly, the potential for scalability and scope for incremental value enhancement continue to exist. Business models are being strengthened and there is a heightened focus on profitability for companies in this space which supports the case for this segment.
Investors seeking exposure to the tech sector could adopt a diversified approach to investing in sub-segments that have a reasonably good earning visibility and structural strength of the business.
Answer : Our stock selection process stresses heavily on the long-term growth sustainability and profitability of the business. Unless there is an issue potentially altering the structural strength of the business, we refrain from reacting to interim volatility. We may increase exposure to the stock if near term correction is more due to transitory factors and offers good price points.
A stock may be sold from the portfolio when it is fully valued, if additional information from the research group gives reason to expect a negative shift in fundamentals, or if the earnings revision trend turns negative. If a stock has under-performed, we may decide to sell the position if there is a reason to believe that the factors driving the correction are long term in nature.
The decision to sell a stock is triggered by 5 events:
- Negative earnings surprise
- Adverse policy changes
- Stock becoming expensive on valuation parameters
- Relative attractiveness
- Trading calls
Answer : Excessive divergence in sector weights in the portfolio compared to benchmark index ought to be well thought through. Optimal approach would be to aim to deliver bulk of the alpha through stock selection rather than sector allocation.
Export oriented sectors continue to face demand headwinds. The global generics within pharmaceutical sector continue to remain challenged on account of pricing pressures and increasing complexity of product development. Technology sector is also going through short term demand uncertainty. However, the current expectations about US economic growth hints at soft-landing rather than recession. So, we believe that the uncertainty engulfing domestic IT sector shouldn’t be prolonged.
Answer : For the year ended in March 2023, funds following value and dividend yield strategies emerged toppers followed by small cap and midcap funds. Amid rising market volatility triggered by policy rate action, value investing strategy gained momentum. In the growth strategy, tactical changes were made within the portfolio. Lowering exposure to select domestic cyclicals including discretionary, materials and real estate while increasing exposure to financials through banks aided performance in small and midcap portfolios.
A key challenge was to deal with pockets of high valuation in mid & small caps segment. The risk of exposure to high valuation businesses called for adopting a cautious approach. Buy and hold strategy followed in our equity portfolios helped us. Many of the Key stocks that caused underperformance in FY2022 rebounded in FY2023. Looking past the near-term underperformance, conviction in the underlying business worked favourably for the portfolio as markets recognized value in these holdings.