Cash Only Helps In Buying Opportunities And Redemptions

We try to ensure that the portfolio remains highly diversified. We do not make big sectoral bets and look at stocks with large market capitalisation and high liquidity

Think Franklin Templeton Investments and chances are, you'll think "growth" and "value" - their two distinct celebrated styles of investing.

In India, too, the fund house religiously adheres to the same philosophy that has brought it much fame across the investment world. With Rs 3326 crore of assets under management, the fund company has a marketshare of 8.29 per cent in the mutual fund industry.

Rajiv Vij, regional head - India and Middle East, Templeton Asset Management tells Indira Vergis why he believes only a focused and disciplined approach will help investors sail through the stock market's many tempests.

Could you elaborate on the philosophy behind your fund house's investment strategy?

On the premise is that equity investments make sense for the long-term investor, there are two broad styles of investment management: active and passive. If investors are convinced that markets are headed upwards in the long run, they might prefer to "buy the market". Buying the market or index is passive investing.

The other type is active investing where investors depend on fund managers who actively manage funds through a defined investment style. It's still a relatively new concept in India. Here, investors have historically bought fund based on returns.

Even when investors diversify, they'll diversify across mutual funds giving similar returns. The problem here is that those funds may have similar portfolios and that means the investor is not really diversifying.

Essentially, the concept here to understand is that you should really invest through a "value" or "growth" style. Very simply, in a growth-oriented portfolio, a manager seeks fast-growing companies that have a strong earnings momentum.

The stock may seem a bit expensive at a point in time, but the belief is that because the company is growing so well, the stock price will keep going up. A value-oriented approach will assess the fundamental, intrinsic value of a company.

If it's intrinsically worth Rs 100 and is available in the stock market at Rs 80, it's good value - even if the company is making a loss currently. Look at the recent L&T cement stake deal. The cement plant was not the most exciting part of the business, but someone still paid a premium to buy it. That's an example of value investing. Decisions here are not driven by immediate profitability enhancement.

But don't growth and value style investing sometimes throw up the same stocks?

Absolutely. One broad reason is because both value and growth investors look at a similar universe of stocks. While a value investor will evaluate on valuation parameters, a growth investor looks at the same stocks but applies different criteria. It may happen that some stocks match the criteria for both categories.

In the Indian context, particularly, the universe of stocks one can really invest in is small - around 150 or 200 stocks. There's an even higher chance of an overlap here compared with the global situation.

What time horizons do you look at in these investment styles?

While value investing, we usually assess a company's intrinsic worth from a five-year perspective. But that doesn't mean we won't sell stocks in three years or hold on to it for seven years. If you know a stock has this amount of value, own it.

Sooner or later, the value will get unlocked. When it's about growth investing, our time horizon is a little lower and the reason for that is that we look at the earnings position. If that situation were to change, our view on the stock could change as well.

Why do you believe that index funds are a great investment vehicle for Indian investors?

Ideally, investors should diversify their equity investments across the three styles of index, value and growth. Choosing either the growth or the value style alone could deliver good results over a period of time, but it will still be volatile. A combination brings about a nice moderation, and you'll get you're long-term returns without the ups and downs of a roller-coaster ride.

Index funds, particularly, are a great proposition in the Indian context. A large number of Indian investors still want a fixed return from their investments and are heavily skewed towards investing in bank and fixed deposits. They're still concerned about the risks associated with equity.

Index funds are a nice stepping-stone to familiarise investors with equities. Once they do that, they can get a little more adventurous and start to judge what value and growth stocks are and add them to their portfolio. After that, they could turn to sectoral funds, which are really at the highest end of the risk-reward ladder. At Franklin Templeton, we have an equity fund in each of the three categories.

How often do you trade on your equity portfolios?

Not too often. Even our growth fund is not trading-oriented. What we do try to ensure is that the portfolio remains highly diversified. We do not make big sectoral bets. We only look at stocks with large market capitalisations and are highly liquid. In our growth fund, we look at large and mid-cap stocks.

Even when markets fall dramatically, would you rather stay invested or pull out?

Rather than focus on where the market is headed in the short-term, we believe that investors should concentrate on reaching their financial goals. You must understand your short and long-term goals and match investment products with those goals. Equity funds should meet long-term objectives.

The mistake that people make is that they spend too much time figuring out which is the best- performing fund to invest in. Our stung recommendation is to not worry about which fund to buy. It's more important to keep buying fixed amounts of the equity fund of your choice regularly.

Over time, this disciplined approach of averaging investments produces superior returns compared with timing the market. So, discipline yourself to invest regularly in a systematic investment plan.

In times of heavy stock market turbulence, do you believe moving into cash could cut losses?

No. We believe cash only helps in buying opportunities and redemptions. We don't use cash as a hedge to move in and out of the market. We believe that when an investor gives us money to invest in equity, he expects us to do just that. If he (investor) wanted to hedge his portfolio, he would put money in a debt fund or bank deposit too. So, we like staying invested in the market as much as possible.

What's the outlook for debt mutual funds?

I would definitely be very cautious on future returns. Debt fund returns have two components: the yield and capital appreciation/depreciation, which is a function of interest rate movements. With interest rates coming down in the past 18 months, debt funds have had a fantastic run, because of high capital appreciation.

In fact, as much as 40-50 per cent of the returns may have come just through capital appreciation. That is definitely something you can't bank on happening in the future. However, for a medium-term horizon - one to three years - debt funds continue to be a great investment choice.