Franklin India Smaller Companies Fund Direct Rnvstmnt of Inc Dist cum Cap Wdrl INF090I01IP6

The coverage list for small/ mid-caps is built by the portfolio managers in conjunction with the analysts. When selecting companies, the investment team places strong emphasis on qualitative aspects such as managerial strengths and corporate governance; also, rigorous business analysis is performed to understand the growth prospects of the industry, its competitive landscape, entry barriers, and scalability prospects.

R. Janakiraman selects companies that can generate consistent and sustainable earnings growth over a business cycle and have low leverage and reasonably high returns on equity. He is aware that it is difficult to forecast earnings in small/mid-caps, hence, he uses historical five-year data as a yardstick to project five years ahead. He is not very rigid on valuations, so long as the company fulfills his investment criteria.

That said, the strategy is not without risks. The valuation-conscious approach and manager’s inability to play momentum will hold the fund back during speculative or bull markets, as has been the case in 2020 and 2021. Also, challenges to liquidity continues, as any adverse environment could pose challenge to the strategy, given liquidity in the small-cap space could be tricky. Moreover, it would also be prudent to observe how Janakiraman’s workload is rationalized and in what way it impacts his fund management responsibilities. These factors therefore lead us to retain an Average rating for the process.

R. Janakiraman’s investment style involves investing in good quality small-cap stocks and staying invested for the long haul. He has excelled by identifying smaller companies early and then holding on to these for long periods of time and even in challenging market environments. This is in line with the manager’s belief that it may take a while for the market to recognize the true value of a particular stock from the small-cap segment.

The portfolio construction is largely a bottom-up process with no heed to the benchmark. Janakiraman invests 70%-75% of assets in small-cap stocks, 15%-20% in mid-caps, and the balance in large caps and cash. Earlier, the fund used to maintain a relatively higher exposure of 15%-20% in large-cap stocks to provide additional liquidity in the portfolio. However, in the recent times, the exposure to large-cap stocks has come down meaningfully. This is done to bring the fund in line with peers, as in the past, large caps have been a drag on the fund’s performance during sharp rallies in the mid- and small-cap segments.

Janakiraman prefers constructing a diversified portfolio of 70–80 stocks, with the top 10 stocks largely accounting for 25%-35% of assets. Given the risky nature of the strategy, single-stock exposure is largely maintained below 5% to keep liquidity risk under check. Companies having excessive leverage in their books are avoided. Both top-down and bottom-up approaches are used for stock selection, with the latter being more prominent.