Apr 13, 2008

Mutual Funds- Templeton India Equity Income Fund Analysis

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With its value orientation and allocation to stocks outside the Indian market, Templeton India Equity Income Fund (TIEIF) is a reasonable option for investors looking to diversify their portfolio.

The fund's NAV has declined about 21.5 per cent over the quarter, while the Sensex has fallen 26 per cent and the average diversified equity fund (invested in Indian stocks) has shed 32 per cent of its value. Though the fund has managed to contain the decline in its NAV to levels below the Sensex during the correction, this is true of other international funds as well.

Suitability: With a focus on stocks offering high dividend yield in India and abroad, TIEIF is well suited to conservative investors with moderate return expectations. It is also a good portfolio diversifier on two counts. One, its dividend yield focus gives it a tilt towards "value" stocks.

Most Indian equity funds tend to be managed in the "growth" style, actively looking for stocks that capitalise on the India growth story. As the "value" and "growth" styles tend to outperform in cycles, investors with a sizeable equity portfolio may benefit by having a "value" oriented fund in their portfolio.

Two, the rally in the Indian market over the past four years has trimmed the dividend yield on Indian stocks to unattractive levels. TIEIF, by allocating a portion of its portfolio to high dividend yield stocks in other emerging markets, is able to build a portfolio that offers a much healthier dividend yield.

Performance: With a return of about 22 per cent on a compounded annual basis since launch, TIEIF has outperformed the domestic market benchmarks (the BSE-200 managed a 13 per cent return since the fund's launch). The fund has fared particularly well during the recent choppy phase in the market, gaining more than the index during the rallies and losing less than it, during the corrective phases.

The fund has not been an aggressive churner of the portfolio. For the domestic component, high dividend yield stocks from the large-cap basket, such as ONGC, SAIL, Hindalco and Tata Chemicals have been among top choices.

The fund has also ventured into some mid/small-cap holdings such as Union Bank and Sundaram Finance in recent times, in search of higher dividend yield. About a fifth of the assets were in stocks with a market capitalisation of less than Rs 10,000 crore in February. This may add to the return potential in the medium term.

For the overseas component, now at over 32 per cent of the portfolio, the fund has diversified widely across markets as well as sectors, using its strong emerging markets team to identify picks from sectors not well represented in the Indian listed space.

Overseas exposures such as Anglo American Plc (US), Lukoil Holdings (Russia), and Ternium SA (South Africa) have been used to widen the basket of commodity and energy stocks. United Microelectronics (Taiwan), Samsung Heavy Industries (Korea) and Shanghai Power Machinery are some of the industrial products and durables exposures that figured in the February portfolio.