Equity Insights : Fund Manager Perspectives 25th May 2015
A winning alpha strategy in the large cap world
Anand Radhakrishnan, CIO-Franklin Equity, Franklin Templeton Investments

imgbd Equity Insights is a joint initiative between Franklin Templeton Investments and Wealth Forum, where we aim to provide 360 degree business, advisory and fund management perspectives on equity investing, to enable advisors and distributors to position equity funds better and help investors genuinely gain from the long term wealth creation potential of equity funds.

In the inaugural edition of Fund Manager Perspectives, Anand Radhakrishnan delves into the world of large caps - a space where alpha generation is getting increasingly challenging - to give us insights into how he and his team maintain their winning ways of alpha generation. Does a buy and hold work in the large caps space or are fund managers compelled to be more momentum driven? What is the value of buy side research among large caps that are already so well researched? How is alpha really generated in large cap funds? Read on to understand all this and more from an ace alpha generator.

WF: Large caps are generally well researched, with substantial sell side brokerage coverage on most stocks. In this context, what is the thrust of your team's research efforts in the large caps space?

Anand Radhakrishnan: While large caps are highly researched, the time horizon of the research varies in the market place. Analysts look at data from different time horizon perspectives, which create mispricing opportunities in the market. There are several large cap stocks that have very high frequency of data points fed into the market. This attracts a lot of traders, many of whom have short to very short term horizons. Presence of active traders often leads to mispricing when you look at the business from a longer term perspective.

Our effort is essentially to step away from the high frequency data and look at the business from a more medium to longer term perspective. We look at a horizon of at least 2-3 years, and don't mind holding on for much longer periods of 5-10 years, where we find the business shaping up well. Ours is a strategic investment call, while traders take a tactical view. Tactical views based on market reactions to high frequency data give rise to strategic buying opportunities.

WF: How important is momentum as an influence on portfolio decisions? Does a competitive market place make it imperative to regard momentum as a key influence?

Anand Radhakrishnan: Not for us, I would like to believe. There are various types of momentum: there is stock price momentum, there is earnings momentum etc. We would like to look at more fundamental factors like business momentum or earnings momentum as an influence of a portfolio decision than only stock price momentum.

Having said that, a well performing stock does make it imperative for portfolio managers to take a full look at it, in case they have not already done it. But in itself, stock price momentum should not become a decision making factor. You might want to relook at it if you had missed out some substantive investment angles and some good things about that idea which earlier you had overlooked or not taken a good look. Momentum does make one review a stock, but it should not influence a decision to buy a stock.

WF: Between active trading and buy-and-hold in the large caps space, which one works better? What has been your experience?

Anand Radhakrishnan: By and large you should hold on to some long term winners. You should try to do that with more and more proportion of your portfolio. That said, markets do tend to have large mispricing related issues even in large caps in which case one has to have a tactical approach as well. Then again, some stocks may be appealing purely on account of a cyclical recovery. You may not want to hold them for 5-10 years, yet you see value from a 2 year perspective. There will, in reality, be a combination of tactical bets, medium term bets and long term holds in your portfolio. Practically speaking, a 100% buy and hold is not possible, however the endeavor should be to have a large proportion of your portfolio in that segment.

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