Franklin India Large Cap Fund Direct Reinvestment Inc Dist cum Cap Wdrl INF090I01FP2

The following text is from June 12, 2023.

The investment process continues to be research-intensive and relies on a bottom-up approach with top-down overlay. Venkatesh Sanjeevi prefers stocks that meet his quality and valuation requirements.

On the quality front, he runs hygiene checks on the company’s management quality, competency of the team, corporate governance issues, its track record of capital misallocation, and whether it can make long-term decisions. He would select companies with clean balance sheets, strong business models, and sustainable competitive strengths. To make the cut, the company must have a good runway for a profitable growth over the long term. He doesn’t like companies that can grow for two to three years and then plateau.

On the quantitative side, he prefers companies that can generate around 12%-13% return on capital over the cost of capital over a cycle. From a valuation perspective, he looks at metrics that are apt for a given company and sector, such as price/earnings, price/book, or price/enterprise value (for insurance companies) and cash-flow-based metrics.

He is flexible with valuations in case he sees strong growth ahead, but the quality framework would be more sacrosanct. The investment approach is thorough, and Sanjeevi has clarity in terms of how he would like to take the fund ahead. However, it’s just been over a year of him managing this fund and hence the efficacy of his thought process, investment approach, consistency in portfolio construction, and execution of the strategy must be evaluated over time. Therefore, we retain the Process Pillar at Average for now.

Certain aspects of Venkatesh Sanjeevi’s investment style are in line with Franklin’s thought process, such as growth-at-a-reasonable-price approach, long-term focus, and buy-and-hold approach to portfolio construction. Like Roshi Jain, he does not shy away from taking big stock bets. Based on his conviction, he can have stock weights in the portfolio to the highest permissible limit.

However, there are elements where his investment style differs from Jain’s, and that was the driver for changes in the portfolio. Sanjeevi is relatively more tilted toward growth than Jain, and that led to the stock-level changes in the portfolio. He is not a closet indexer, but he is benchmark-aware while investing. The portfolio continues to have concentrated exposures in his high-conviction stocks, yet Sanjeevi diversified the portfolio by adding more stocks. This is a departure from the concentrated approach that Roshi used to ply.

Sanjeevi constructs a more broad-based portfolio with representations of stocks from across sectors. For instance, Jain was underweight in consumer defensive and technology sectors; Sanjeevi has built exposure in these segments. He is also open to the idea of using the leeway of investing 20% in mid- and small-cap stocks. However, he will be selective there and would invest only in stocks that are liquid and have long-term growth visibility. While Sanjeevi agrees that his choice of stocks is comparatively more expensive than the names earlier in the portfolio, these stocks have long-term visibility of growth.