Franklin India Bluechip Equity Fund- Portfolio Report August 31, 2013

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21 Buddha

...Connecting the dots

Table of contents

Market Narrative 1

Product Overview 2

Portfolio Snapshot 3

Investment Process 4

Performance Summary 5

Portfolio Analytics 6

Risk Tracker 7

Bottom-line 8

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This product is suitable for investors who are seeking : • Long term capital appreciation • A fund that invests in Indian large cap stocks High Risk* (Brown)

*Risk indicators are colour coded as: • (Blue): Investors understand that the principal will be at low risk. • (Yellow): Investors understand that the principal will be at medium risk. • (Brown): Investors understand that the principal will be at high risk.

Market Narrative

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Indian equities witnessed yet another volatile season in the month of August with benchmark indices Sensex & Nifty losing 3.8% & 4.7% respectively on monthly basis. The principal driving factors were depreciating INR and RBI’s reluctance to decrease interest rates. Q1 FY14 GDP growth registered a record low of 4.4%. Even IIP growth went down to 0.6% level. Concerns about slowing Indian economy, huge fiscal & current account deficit, high inflation and muted first quarter results by Corporate India has further dampened mood for the institutional investors. On the global front, Syrian crisis and the fears of liquidity tapering by US Fed escalated problems for investors. FIIs pumped out INR 59 billion from Indian equity markets. All these factors have created a major downward pressure on Indian rupee; it touched its all time low of 68/$ mark in the month. The only reliefs were better than expected monsoons and FDI growth. Better monsoons should help GOI in countering inflation from supply side.

Indian Equity Indices Performance

Index Monthly Return

(%) YTD Return

(%) 1 Year Return

(%) 3 Years Return

(% Ann) 5 Years Return

(% Ann) 10 Years Return

(% Ann)

S&P BSE Sensex India -3.75 -4.15 6.83 1.19 5.04 15.93

S&P BSE 200 India -4.53 -10.58 2.07 -1.99 4.00 14.65

S&P BSE 500 India -4.46 -11.97 0.63 -2.90 3.46 14.74

CNX Nifty -4.71 -7.34 4.06 0.43 4.65 14.97

MSCI India Index -3.08 -4.89 7.62 0.30 4.48 15.08

As of 31-Aug-2013

Exhibit 1

Monthly Sectoral Indices Performance 13.11

7.63

-1.19

-3.47 -5.00

-6.62 -7.29 -8.44

-9.93 -10.32 -10.88

-13.88

Meta

l

IT

Healthca

re

Auto

Oil

& G

as

FM

CG

Pow

er

PSU

BAN

KEX

Consu

mer

Dura

ble

s

Realty

Capital G

oods

Exhibit 2

Source: Bloomberg

IT & Metals bucked the downward trend due to rupee depreciation whereas Capital Goods and Realty turned out to be the worst monthly performers. See Exhibit 2.

Product Overview

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Static Info Asset class: Domestic Equities Category: Large Cap Structure: Open ended Manager’s benchmark: S&P BSE Sensex Inception Date: Dec 1, 1993 AUM: INR 46150 million Total Expense Ratio: 2.16% Fund Manager: Anand Radhakrishnan & Anand Vasudevan MORNINGSTAR Style Box ®

Equity Style

Larg

e

Siz

e

Mid

Sm

all

Value Blend Growth Style

Franklin India Bluechip fund, an opened ended equity scheme aims to generate superior returns thru’ long term capital appreciation from a diversified pool of large cap stocks. Its benchmark is S&P BSE Sensex but as a truly active fund its holdings goes beyond that 30 stocks investible universe. The fund manager, Anand Radhakrishnan adopts a bottom-up approach to Stock selection and commands the freedom to choose stocks across various sectors, themes and investment style. This fund certainly belongs to the mainstream equity participation products available in the country. It boasts of a rich survival history of twenty years in the market. As the name itself suggests, it has a strong bias for large caps and it also follows a disciplined diversification approach. Fund Manager, Anand Radhakrishnan is well known in the investment circle for his knack for stock picking. He puts rigorous quality constraints for screening his target stocks, often goes beyond the financial performance indicators in the quest for alpha bias. He use a mix of DCF and relative valuation principles in his proprietory valuation models. He capitalizes well on the irrational market behavior and has never shied away from taking contrarian calls against the broader consensus. Over the years it has performed really well against the benchmark. In the peer group rankings it’s been very consistent with its 1st quartile position. On the risk reward front as well, it has delivered impressive results. All these factors have translated into an excellent response by the retail investors. This is captured well in its AUM growth as shown in Exhibit 3.

-

50,000

1,00,000

1,50,000

2,00,000

2,50,000

3,00,000

3,50,000

4,00,000

Q2 08 Q1 09 Q4 09 Q3 10 Q2 11 Q1 12 Q4 12

AUM growth in the last five years

AAUM (in lakh INR)

Exhibit 3

Portfolio Snapshot

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94.64%

0.02%

5.34%

Asset Breakdown

Equity Fixed Income Cash & Cash equivalents

Exhibit 4

21.42%

12.49%

9.82%

8.46% 8.43%

5.92%

5.74%

5.07%

4.75%

17.90%

Sector Breakdown

Banks

Software

Pharmaceuticals

Telecom

Petroleum Products

Power

Cement

Auto

Minerals/Mining

Others

Exhibit 5

8.73%

7.76%

5.58%

5.35%

4.97%

4.89%

3.92%

2.86%

2.86%

2.83%

Infosys Ltd.

Bharti Airtel Ltd.

ICICI Bank Ltd.

Reliance Industries Ltd.

Dr Reddy's Laboratries …

HDFC Bank Ltd.

Grasim Industries Ltd.

Cognizant Technology …

IndusInd Bank Ltd.

NTPC Ltd.

Top Ten holdings Exhibit 7

Source: Franklintempletonindia.com

As of 31st Aug, 2013, almost 95% of the assets have been invested in equities (as shown in Exhibit 2). Amongst sectors, the portfolio has highest exposure to Banks. Its cyclical nature helps during market recovery periods. The detailed sector breakdown has been shown in Exhibit 5. At a Super sector level, the Fund manager has tried to optimize his diversification strategy into Cyclical ~42% and Sensitive stocks ~40.5%. The top ten holdings list as shown in Exhibit 7 truly reflects his strong bias for out of favour blue chips. Stocks like Infy & Airtel have been facing headwinds in the market since last couple of years. He clearly favors market leaders having excellent management teams, solid corporate governance structure and cash positions. 50% of the assets have been invested in the Top 10 holdings.

88.87%

9.63%

1.50%

MCap Breakdown

Large Medium Small

Exhibit 6

Characteristics View

Div Yield P/E P/CF P/B Current Ratio

Portfolio 1.85 12.40 8.23 1.80 1.31

Benchmark 1.67 15.87 12.05 2.54 1.39

As of 31-Aug-2013

Investment Process

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Their Investment Process has been built around the premise that superior risk adjusted returns can be achieved over time by using a team-oriented, collaborative approach and disciplined, bottom-up fundamental research.

Universal screening based on market-cap filter

Identifies growth stocks with wide economic moats

Initial due diligence on valuation and risk

Detail company investigation undertaken by sector analysts

Portfolio construction, maintenance & oversight on ongoing basis

Large Caps

High quality names

Underpriced, out of favour names

Fundamental analysis

For this fund, Anand Radhakrishnan follows a bottom-up approach to portfolio management. The whole framework has been divided into various stages. Anand and his team decides the coverage universe on the basis of market capitalization. They retain large caps who are also market leaders in their space. They also have a strong bias for brands which have high entry barriers, robust business model, follows industry best practices and high corporate governance standards. As mentioned earlier the manager often goes beyond the benchmark, S&P BSE Sensex for stock picking ideas. The analysts evaluate target companies on the valuation scale using both DCF & relative valuation models. This is one of their most critical building blocks of their portfolio management process as the fund house favours high conviction positions with low portfolio turnovers. The fund manager is always looking to add positions on undervalued scrips. He is also not afraid to take contrarian views on stocks which are facing momentary headwinds but fits nicely in his long term investment criteria. His underweight positions in Auto and FMCG and overweight positions in Telecom & Healthcare as against the peer group affirms those contrarian views . We will cover the impact in the Analytics section. They also have a rigorous on-going oversight process via which they churn out Performance appraisal outcome for their investment strategies.

Exhibit 8

Performance Summary

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This fund has had a stellar performance phase till last year. During that period, it not only delivered superior returns over the benchmark but also managed a top quartile ranking in the large-cap peer group.

5557

4482

0

1000

2000

3000

4000

5000

6000

7000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Wealth Creation over the years

Fund Benchmark

Exhibit 9

v/s Benchmark

Period Fund Return Benchmark Return Relative

1 M -4.62 -3.75 -0.90

3 M -10.09 -5.77 -4.58

6 M -8.19 -1.28 -7.00

YTD -11.08 -4.15 -7.23

1 Y 0.66 6.83 -5.78

3 Y (Ann) 0.74 1.19 -0.45

5 Y (Ann) 8.69 5.04 3.48

10 Y (Ann) 18.71 16.18 2.17

2008 -48.14 -52.45 9.05

2009 84.49 81.03 1.91

2010 22.96 17.43 4.71

2011 -18.25 -24.64 8.49

2012 26.79 25.70 0.87

As of 31-Aug-2013

Anand is known in the industry for his bottom-up approach to stock selection. His careful construction of the portfolio and his strong preference for putting quality filters in his target blue-chip stocks has paid rich dividends. Its well reflected in its relative performance history. It has done remarkably well in all market cycles. (See Exhibit 9 and the adjacent table). However in the last one year, its performance has taken a beating. The fund has trailed Sensex in recent times by huge margins (See adjacent table). This divergent relative performance can be primarily attributed to its high exposure to Banking & Financial Services sector. This has been explained in greater detail in the next section.

This reflects the compounding effects of long term out-performance.

Portfolio Analytics

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Source: Bloomberg

Asset allocation and stock selection decisions are taken by the fund managers. The portfolio has a diversified focus in the domestic large cap universe, currently it holds about forty stocks which have been well spread across various sectors. On various timescales, the fund has beaten the benchmark. Anand has been phenomenal with his active stock picking skills. When it comes to sectors we have seen him accumulating huge positions in the Banking space over the years. He has been fairly overweight on the leading names from both Private & Public sector banking side. This strategy had been working well until FY12 given slight economic recovery post 2008 and healthy asset quality. Though since last one year the situation has become complex. The markets have witnessed divergent business performance by Private & Public sector banks. Private players like Axis, ICICI & HDFC bank have maintained high asset quality and have reported rising NIM and a falling NPA whereas all PSBs have seen fall in asset quality and their bottom-lines have been consistently eroded due to higher provisioning for bad debts. All this has created a big dent on portfolio’s last one year performance. The fund underperformed Sensex by whopping 5.78% in the last one year. Out of this, 2.18% came from overweighting the Banking sector. The fund has suffered similar blows from Cement & Metals primarily due to lacklustre economic environment. He has derived big contributions from his bullish views on FMCG and Telecom counters in the last one year. See exhibit 10 & 11 for 1 & 3 years Attribution results respectively. However investors shouldn’t focus too much on last year one year results. In the last ten years, the fund has beaten the benchmark in 54% of all monthly reporting periods while it also outperformed in 70% of all YOY periods. See exhibit 12.

-0.14

-1.08

0.04

-0.11

1.15

0.08

-0.27

-2.72

0.49

-1.36

0.00

3.25

-1.34

-2.07

-0.61

0.49

-1.47

-0.3

0.02

0.17

Consumer Discretionary

Consumer Staples

Energy

Financials

Health Care

Industrials

IT

Materials

Telecom

Utilities

1 Year Performance Attribution

Stock Selection -1.86 Asset Allocation -3.92

Exhibit 10

-0.69

-5.43

0.68

-0.18

2.59

0.33

-0.33

-5.21

-1.87

-2.98

1.00

4.59

-0.58

4.13

-0.57

0.18

-1.47

3.74

0.87

0.75

Consumer Discretionary

Consumer Staples

Energy

Financials

Health Care

Industrials

IT

Materials

Telecom

Utilities

3 Years Performance Attribution

Stock Selection 12.64 Asset Allocation -13.09

Exhibit 11

No. of monthly reporting periods: 120

Winning Period Losing Period

Exhibit 12

Risk Tracker

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Source: Morningstar

The portfolio management team lays a strong emphasis on risk management. With an eye on both long term and short term Investment outlook they exercise tactical shuffling of exposures between Cyclical, Sensitive and Defensive sectors. This strategy has worked really well during market downturns. For instance in 2008 & 2011 though it posted negative returns but it managed to beat the benchmark and the category average by huge margins. In 2008 & 2011, it outperformed the benchmark by 9.05% & 8.49% respectively. See exhibit 9. On the volatility parameter, it has shown less dispersion in performance compared to the benchmark. See exhibit 13. Even the monthly performance compiled using last ten years data forms a normal distribution curve. Having got more than 95% exposure in large caps, the fund allays liquidity concerns for the investors. In the peer group, its best positioned on the risk & return scatter chart. See exhibit 15. Its one day *VaR to AUM ratio stands at 2.28% as per Bloomberg data. The fund has done reasonably well on several risk adjusted performance meters as well. See the below table. Note: *One day VaR has been computed with 99% confidence level using Monte Carlo simulation technique.

Exhibit 13

Exhibit 14

0

5

10

15

20

25

30

35

40

45

50

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Volatility Comparison

Portfolio Benchmark

0

2

4

6

8

10

12

14

16

18

20

Fre

quency

Portfolio Returns

Monthly Return Distribution

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

0 2 4 6 8

3 Y

ears

Annualiz

ed R

etu

rns

3 Years Standard Deviation

Risk v/s Return

Risk Adjusted Performance 3 Years 5 Years

Std Deviation 16.01 22.8

Mean 0.16 0.91

Sharpe Ratio -0.26 0.21

Information Ratio 0.36 0.74

Treynor Ratio -6.74 3.13

R-Squared 96.93 97.97

Beta 0.82 0.82

Alpha 0.13 3.34

Tracking Error 5.03 6.54

As of 31-Aug-2013 Fund Benchmark Peer group

Exhibit 15

Bottom line

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Contact Us

21 Buddha Investors,

Whitefield, Marathahalli,

Indiranagar, Brigade road, JP

Nagar, Banerghatta road,

Hebbal, Sarjapur, BTM layout,

Electronic city

Still somewhere in Bangalore

+91-8374109195

Visit us at

http://in.linkedin.com/in/kaash

yapsaurabh

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Disclaimer & Confidentiality Note - Due diligence has been

exercised in checking the authenticity of all figures mentioned

in this report. But that does not guarantee its accuracy or

completeness. This portfolio review report has been compiled

with educational and awareness objective. It does not represent

any buy or sell recommendation from our research team.

Past performance is not necessarily indicative of future results.

Also always bear in mind that mutual fund investments are

subject to market risk, read all scheme related documents

carefully before investing.

21-Sep-2013 © 21 Buddha 2013

Franklin India Bluechip fund has been in existence since more than twenty years now and holds an impeccable track record in the Domestic Equity funds space. It is one of the flagship products from Franklin Templeton India business. A thorough historical analysis of this fund’s performance, analytics, style and risk reflects two unique fundamental traits: • The fund manager and his team has always been very particular about the product’s investment focus. That’s one of the primary reasons why the portfolio has a strong bias for quality names in the industry and probably that’s also the reason why we don’t see highly leveraged firms in his list. • The fund manager has a high conviction on his proprietory research models. That’s why he keeps a long term horizon with the portfolio holdings. Though sometimes the team also undertakes tactical decisions on asset allocation and stock selection to check volatility in the short run.

Under Anand’s stewardship we are fairly upbeat on this fund’s future potential despite its poor run recently. The product has a well diversified focus. It has done a phenomenal job of compounding investor’s wealth with small downside deviation. Even its expense ratio is lower than its category peers. Investors with high risk appetite and a long term investment horizon can consider this fund as a solid alpha generating tool in their core portfolio.