The Hindu Business Line : Templeton schemes merger: Uncommon traits

INVESTORS in Franklin India Prima Plus (FIPP) can sell their holdings in the backdrop of a possible merger with Franklin India Growth fund (FIGF). The merger, which has been suggested by Franklin Templeton India and expected to happen over the next three to six months, may lead to change in the investment characteristics of FIPP (formerly Pioneer ITI Prima Plus).

The merger is a fallout of the acquisition of Pioneer ITI by Franklin Templeton India. Given the uncertainty on how the change will affect performance, investors can exit the fund now.

Investors in FIGF can, however, stay with the Fund. One, there is less likelihood of a change in its investment strategy. Second, the performance of the fund in the past 12 months has been relatively better.

Suitability: The recommendation to hold units in FIGF is suitable to investors with a moderate risk profile. The volatility in the fund's NAV has been lower than that of most indices. However, FIGF has been in existence for just over 2 years.

Portfolio review: There are indeed similarities between FIPP and FIGF.

Around 92 per cent of the monthly returns of FIPP and FIGF are explained by the changes in the movements of BSE 200 Index since February 2000, when FIGF was launched.

The investment objective of both FIPP and FIGF are also similar.

Both are committed to following the growth style of investing and are oriented towards generating long-term capital appreciation.

These factors are, however, not enough to suggest that the characteristics of the funds are similar. There are many funds in the market that follow the growth style and aim at generating long-term capital appreciation. Their characteristics differ considerably despite having similar investment objectives. This is true even in FIPP and FIGF.

Significant differences: In fact, quite a few factors suggest differences in their investment characteristics.

FIPP is benchmarked against S&P CNX 500, while FIGF is benchmarked against BSE 100, which is a relatively narrow index.

The portfolio allocation of FIPP and FIGF also show differences.

Apart from these characteristics, the all-important yardstick of performance also shows significant differences between the two funds.

In portfolio allocation, the weightage to IT, FMCG, healthcare and banking sector stocks are higher in FIPP compared to FIGF.

These four sectors account for 63.5 per cent of the net assets of FIPP. In contrast, the weight is only 38.2 per cent in the case of FIGF. Clearly, the approach followed by FIPP is considerably more aggressive compared to that followed by FIGF.

In fact, the distinguishing feature of Pioneer ITI funds has been their bullish view on and relatively aggressive allocation to IT, FMCG and Healthcare stocks.

In contrast, FIGF has always followed a relatively more conservative approach consistent with its slogan "growth at a reasonable price".

This is also reflected in their top holdings. The top holding in FIPP at the end of July 2002 is Infosys Technologies, whereas in FIGF it is BPCL. In fact, though many stocks are common to the portfolios of FIGF and FIPP, the allocations are considerably different. For example, Indo-Gulf, with a weight of 5.35 per cent, is in the top five in FIGF, whereas its weight in FIPP is 0.74 per cent.

There are also other differences in portfolio allocation also exist. FIPP has more than 45 stocks in its portfolio whereas FIGF has 29.

Performance divergence: With regard to performance, FIPP has fared better than FIGF. Since end-February 2000, FIPP lost nearly 30 per cent and outperformed both Sensex and BSE 200.

In contrast, FIGF lost 47 per cent and under-performed both Sensex and BSE 200.

FIGF and FIPP performed better than both Sensex and BSE 200 in the last 12 months.

However, even during this period, FIPP gained 26.5 per cent while FIGF gained 19.5 per cent. In other words, the gulf in performance between these two schemes has persisted even in recent times.

Merger implications: Overall, the performance and portfolio characteristics of FIPP and FIGF have been significantly different. A merger of these two funds, therefore, might lead to the resulting fund following FIGF's style of investment management.

This is likely since Franklin Templeton acquired Pioneer ITI and also because Franklin Growth Fund is a global brand.

This suggests that there will be a qualitative difference in the investment management style of the funds under FIPP. The fallout of such a change may be difficult to quantify now but could be significant from the point of view of Prima Plus.

In such a backdrop, investors in FIPP can exit the fund now and evaluate other options. They can continue to stay invested only if they feel comfortable with the performance and characteristics of FIGF.

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