The team on the Franklin India fund has been trimming positions in state banks while adding to ICICI Bank, one of the largest private sector banks in the country.
Some 18.8% of the $1 billion (£635 million) fund is invested in banks, making it the biggest sector allocation. However, the overall exposure to state-owned banks is only marginal.
Sukumar Rajah, the chief investment officer for Asian equities at Franklin Templeton, says the team prefers private banks to state-owned banks, as many of the state-owned banks have large proportions invested in government bonds.
Therefore, Rajah expects those banks held by the Franklin India fund, as well as other holdings, to benefit from recent interest rates by Reserve Bank of India (RBI). At the end of July, the RBI raised interest rates for the second time in one month owing to concerns over inflation.
The repo rate — the rate at which the RBI lends to banks — rose from 5.5% to 5.75%. The RBI also raised its reserve repo rate from 4% to 4.5%, which is twice the rise that had been forecast.
The RBI said in a press statement that even though food and consumer price inflation have shown some moderation, they are still in double digits. (article continues below)
Led by Stephen Dover, the Franklin Templeton team has been gradually adding to ICICI Bank over the past three quarters.
“We did not like the stock a year ago because we had concerns that the management was expanding the business too fast,” says Rajah. “They had a terrible time in 2009 but then changed the management, which gave us confidence. The new management is more focused on profitability.”
Today, ICICI Bank is the third biggest holding of the fund, at 6%. A year ago, it did not feature in its top 10 holdings. In turn, the team cut State Bank of India and dropped it from its top 10.
“The new management is more focused on profitability”
According to Rajah, the rest of the fund is also relatively immune to interest rate rises as the team prefers companies that tend to have low leverage.
Searching also for return on capital and sustained value creation, Rajah says the team currently finds growth opportunities across multiple sectors, including information technology, consumer stables and large banks.
But other sectors, such as real estate and construction, are often plagued by poor corporate governance. “We want high conviction in good corporate governance,” Rajah says.
Overall, the fund is currently considerably underweight commodities. However, the team is planning to add to the sector once the market turns around.
“We have already seen some correction, but we expect to see more,” Rajah says.
Much of the fund is invested in mid and large caps, with large caps being the top 100 in the Indian market, mid caps the next 200 and small caps the rest. The fund does not currently have any exposure to small caps on the grounds they are too small and too illiquid.
Note: This article was updated at 16:58