A look at 9 tax-saving funds

L&T Tax Advantage

  • Benchmark: BSE 200
  • Investment Style: Large Growth
  • Fund Manager: Soumendra Nath Lahiri
  • Star Rating: 4 stars
  • Analyst Rating: Bronze
  • Morningstar Analyst: Kavitha Krishnan
  • Date of Analysis: March 2018
  • 3-year annualized return (Mar 15): 13.40%

Lahiri follows a bottom-up, benchmark-agnostic investment approach focused on investing in companies that are efficient allocators of capital. Thus return on capital employed is one of the critical parameters used for evaluation. The manager focuses on the profitability and attractiveness of a business, competitive position within its industry, and stage in the business cycle.

Lahiri considers discount cash flow valuations along with price/earnings, enterprise value/EBITDA, and price/book value as key parameters to look at while evaluating stocks, and considers relative valuations within the industry to find the companies in which he wants to invest.

Analysts track a core list of about 300 companies that are evaluated on the basis of business, management, and valuations. The analysts derive price targets for the stocks and also run sector-neutral portfolios for the sectors, which serve as guides to the fund manager while investing. Lahiri prefers to invest in good businesses at reasonable valuations or firms with improving fundamentals.

A benchmark-agnostic approach may result in large overweight or underweight positions relative to the benchmark, though a risk-management function plays a critical role in highlighting key portfolio risks. The process is sound and the execution has been good, thus producing pleasing results for investors so far.

Read the brief research synopsis here

DSP BlackRock Tax Saver

  • Benchmark: BSE 200
  • Investment Style: Large Growth
  • Fund Manager: Rohit Singhania
  • Star Rating: 4 stars
  • Analyst Rating: Neutral
  • Morningstar Analyst: Himanshu Srivastava
  • Date of Analysis: December 2017
  • 3-year annualized return (Mar 15): 12.21%

Analysts construct sector-based model portfolios comprising the best ideas from stocks in their investment universe. Stocks are evaluated using quantitative ratios such as return on capital employed, return on equity, P/E, price/book value, and EV/EBITDA, among others, with the analysis and research inputs of key sell side analysts incorporated into the model.

The manager uses sector-based model portfolios created by analysts as his initial reference point, and he plies an overlay by using the change in ROCE/ROE compared with a company’s intrinsic growth and P/BV as an appropriate measure to evaluate stocks.

Stress is laid on understanding a company’s business model, expected cash flow, key business drivers, and the scalability prospects of the company and the sector in which it operates. The fund manager prefers investing in businesses with rising/high ROEs and cash flows. Additionally, he uses relative valuation measures to invest in stocks that are temporarily mispriced within a sector using relevant quantitative ratios and also invests a small portion of the portfolio in value stocks trading below half their book values.

Although the manager is rooted to a bottom-up style, top-down factors are not entirely ignored as the macroeconomic scenario and government policies, combined with industry/sector analysis, are used to identify and give an overweighting to sectors that demonstrate strong pricing power.

Singhania implements an unconstrained, benchmark-agnostic approach without any bias towards a stock or sector while constructing the portfolio. He manages the fund with a rather aggressive investment style, which entails churning the portfolio frequently to capitalize from the investment opportunities arising in the interim. He will therefore not hesitate to increase or reduce allocations swiftly in response to rising and falling stock prices. Additionally, he believes in buying and selling huge amounts to make meaningful difference in the portfolio. 

Read the brief research synopsis here

ICICI Prudential Long Term Equity Fund (Tax Saving)

  • Benchmark: BSE 200
  • Investment Style: Large Growth
  • Fund Manager: George Joseph
  • Star Rating: 3 stars
  • Analyst Rating: Neutral
  • Morningstar Analyst: Himanshu Srivastava
  • Date of Analysis: October 2017
  • 3-year annualized return (Mar 15): 8.54% 

George Joseph plies a benchmark-agnostic multi-cap strategy here. He uses a combination of top-down and bottom-up approaches for selecting stocks, with the latter being more dominant. He draws from CIO Sankaren Naren’s views on macroeconomic scenarios to identify sectors where valuations look attractive; this in turn forms the basis of Joseph’s sector bets.

Joseph is fairly valuation-conscious; although he invests in both growth- and value-style stocks, he avoids paying too much for an issue. He prefers stocks that are cheaper than their peers and historical valuations on the price/book value and P/E measures. His investment style is contrarian at times, with investments in beaten down stocks, particularly when the issue is negatively affected because of poor market sentiments.

He has made a few modifications in the fund’s strategy, though, with an intention of eliminating some of its risky aspects that do not jell with his investment style. Hence, short-term trading is no more a part of the investment strategy, as Joseph believes in a buy-and-hold approach. Having said this, the strategy is not without risks. In frothy markets, the valuation-conscious approach can result in relative underperformance, and stocks bought based on attractive valuations could continue to fall further, leading into a value trap. Also, the unconstrained nature of the investment approach carries higher execution risk.

While investing, Joseph classifies stocks into three broad buckets--global cyclicals, defensives, and domestic cyclicals--and takes a top-down view for deciding on an appropriate allocation in them. He invests in both large as well as small/mid-cap stocks and their proportion in the portfolio depends on relative valuation. However, he prefers maintaining at least 40%-50% of the portfolio in large-cap stocks always from a liquidity and stability perspective.

Read the brief research synopsis here

SBI Magnum Taxgain

  • Benchmark: BSE 200
  • Investment Style: Large Growth
  • Fund Manager: Dinesh Balachandran
  • Star Rating: 3 stars
  • Analyst Rating: Neutral
  • Morningstar Analyst: Himanshu Srivastava
  • Date of Analysis: September 2017
  • 3-year annualized return (Mar 15): 6.93%
 Stocks are selected using both top-down and bottom-up approaches, with the latter being more prominent. Balachandran considers the macroeconomic scenario while taking sector/thematic bets, but the benchmark alignment has made this aspect of the strategy less relevant. While benchmark alignment can theoretically reduce the risk of relative underperformance, the valuation-conscious approach will result in the fund struggling in sharply rising or momentum-driven markets.

In our opinion, the investment approach is common enough, and its execution will play a key role in determining the fund's long-term success. We would like to evaluate the process over the long haul before building confidence in it.

Dinesh Balachandran has restructured the portfolio to align it with his value style of investing. The fund's structure requires the manager to ply a benchmark-conscious strategy while constructing the portfolio's sector weightings. The stated deviation range is within +/- 8 percentage points of the benchmark index's (S&P BSE 100) sector weightings. Also, if a stock accounts for at least a 5% weighting in the index, the manager would typically include it in the portfolio to adhere to the professed benchmark alignment.

Balachandran believes that his style necessitates investing for the long haul, and hence he invests with a 3- to 5-year investment horizon. He is willing to endure short-term pain for long-term gains.

Read the brief research synopsis here

Axis Long Term Equity

  • Benchmark: BSE 200
  • Investment Style: Large Growth
  • Fund Manager: Jinesh Gopani
  • Star Rating: 4 stars
  • Analyst Rating: Silver
  • Morningstar Analyst: Kavitha Krishnan
  • Date of Analysis: June 2017
  • 3-year annualized return (Mar 15): 8.98%

 Jinesh Gopani looks for companies that have the capability to grow over a 3- to 5-year period and seeks to find quality names at reasonable valuations. However, he can tend to invest in stocks that are slightly expensive in relative terms (reflected in the fund's higher P/E ratio) as long as they meet his quality and growth criteria. The portfolio comprises about 50%-70% large-cap stocks, while small and mid-caps constitute the remaining portion.

The focus is on identifying companies with sustainable earnings-growth potential, credible management, and good corporate governance practices. Stock-picking is based on fundamental bottom-up research with an emphasis on top-down risk parameters, liquidity, and internal volatility targets. From a financial standpoint, the team members look for companies with low capital gearing and strong balance sheets. They undertake a 360-degree approach while evaluating a company by ensuring that thorough channel checks are in place and by speaking to dealers, distributors, clients, and so on.

The fund house has a research universe of about 350 stocks, which are placed into three segments based on the frequency and depth of coverage. It seeks to spend more time identifying fresh ideas and companies that are not as widely researched by the broader market. The research team also runs a live model portfolio, which is essentially a combination of its best ideas.

The fund reflects Gopani's high-conviction ideas and has a distinct character. This results in a benchmark-agnostic portfolio that typically shares a very low overlap of about 25% to 30% with the S&P BSE 200 Index. The team members tend to take significant exposures against the grain in stocks based on their conviction levels.

Read the brief research synopsis here

Franklin India Taxshield

  • Benchmark: BSE 200
  • Investment Style: Large Growth
  • Fund Manager: Lakshmikant Reddy
  • Star Rating: 4 stars
  • Analyst Rating: Bronze
  • Morningstar Analyst: Himanshu Srivastava
  • Date of Analysis: May 2017
  • 3-year annualized return (Mar 15): 8.17%

The investment process is research-intensive and relies heavily on a bottom-up approach. Portfolio managers and analysts jointly decide on the coverage list where they look for growth companies that fit their qualitative requirements.

Only companies that have durable competitive advantages versus peers, sustainable business models, strong entry barriers, able management teams, and good corporate governance standards are included in the coverage list. This is followed by quantitative analysis in which analysts gauge companies using a combination of discounted cash flow models and quantitative parameters relevant to the sector.

Analysts create sector-based model portfolios that are then combined by the research head to create market-cap-based portfolios. Reddy Lakshmikanth uses these model portfolios as his initial reference point. He invests in stocks he believes have good earnings growth potential. He is valuation-conscious and avoids areas of the market that in his opinion are richly valued. He would not shy away from investing in beaten-up growth stories and out-of-favour companies that face near-term headwinds but are fundamentally sound. The managers invest in stocks with a long-term horizon. Taking cash calls is not a part of the investment strategy.

The process is sound and workable over the long term and it has been executed with skill by the investment team so far. 

Read the brief research synopsis here

HDFC Tax Saver

  • Benchmark: BSE 200
  • Investment Style: Large Growth
  • Fund Manager: Vinay Kulkarni
  • Star Rating: 3 stars
  • Analyst Rating: Silver
  • Morningstar Analyst: Kavitha Krishnan
  • Date of Analysis: May 2017
  • 3-year annualized return (Mar 15): 8.25%

Vinay Kulkarni has a quality bias when investing in stocks. He chooses companies with good corporate governance standards and strong business models that enjoy sustainable advantages in the form of barriers to entry, market share, low cost of production, technological edge, and capable management teams. Although he prefers companies with low leverage, he is not constrained by this criterion as long as he is comfortable with the valuations and the business model. Kulkarni understands that companies that satisfy his investment criteria may not be cheap and he is willing to pay more for such issues, but he refrains from investing in overvalued stocks and sectors.

Kulkarni largely relies on the investment team for stock recommendations. Analysts gauge companies using discounted cash flow and quantitative models and rate them on a scale of 1-4. Analysts use relative valuation metrics like P/E, P/BV and other quantitative measures like ROCE while evaluating stocks. Given the investment approach, Kulkarni’s portfolio reflects a growth-at-a-reasonable-price approach to investing.

While ideas are leveraged from sell-side analysts, investment decisions are based on the team's own internal research. Kulkarni is benchmark-agnostic when constructing the portfolio. He aims to derisk the portfolio by investing in uncorrelated sectors of the economy. Although he took cash calls in 2011, they are no longer a part of the investment strategy.

Read the brief research synopsis here

Reliance Tax Saver

  • Benchmark: BSE 200
  • Investment Style: Large Growth
  • Fund Manager: Ashwani Kumar
  • Star Rating: 4 stars
  • Analyst Rating: Bronze
  • Morningstar Analyst: Kavitha Krishnan
  • Date of Analysis: April 2017
  • 3-year annualized return (Mar 15): 7.04%

Ashwani Kumar plies a growth-at-a-reasonable-price strategy. He typically scouts for companies with strong and sustainable business models. He will be flexible with valuations and pay what he thinks is fair price, given the company’s growth prospects. For instance, since end-2010, he largely avoided consumption stocks due to high valuations; however, he has bought into a few consumption names post-2014, based on their fundamentals and growth prospects. He tends to take a 2- to three-year view on stocks and focuses on factors such as return on equity, and return on capital employed, when evaluating companies.

There is also a qualitative overlay in the analysis. He looks for factors including management quality, superior technology, favourable cost margins, and brand equity, which can give the company a sustainable edge vis-à-vis the competition. The top-down approach is important; factors such as the interest-rate scenario, barriers to entry, pricing power, policy measures, and expected consumption/spending patterns are considered when investing. Overall, we believe the process is solid.

The manager typically aims to invest in differentiated businesses and gain a first-mover advantage in terms of identifying the stock as well as ensuring that he is buying at the right price points. The process has risks, given the benchmark-agnostic approach and sizable sector bets. Kumar’s penchant for diverging from benchmark weightings and willingness to take active sector bets results in a portfolio that is significantly distinct from that of its peers. The fund is typically run as a sector heavy, concentrated portfolio with a major portion of its assets under management invested in three or four meaningful sectors. 

Read the brief research synopsis here

Sundaram Diversified Equity

  • Benchmark: BSE 200
  • Investment Style: Large Growth
  • Fund Manager: S Krishnakumar
  • Star Rating: 3 stars
  • Analyst Rating: Neutral
  • Morningstar Analyst: Kavitha Krishnan
  • Date of Analysis: April 2017
  • 3-year annualized return (Mar 15): 10.94%
We believe in S. Krishnakumar’s ability to identify and invest in stocks that tend to exhibit growth characteristics over the fund’s three- to five-year investment horizon.

Krishnakumar follows a combination of a top-down and bottom-up approach, and seeks to invest in growth stocks that can tend to double over the fund’s investment horizon. While the fund house has a fairly strong thematic undercurrent that drives sector selection, stock selection remains primarily driven by fundamentals.

The manager tries to balance the stock’s perceived return, growth, and valuations while maintaining a lower liquidity risk. The manager combines absolute and relative valuation techniques using discount cash flow models and quantitative ratios such as return on equity, enterprise value/EBITDA, price/earnings, and price/book value among others to make investment decisions.

Research analysts use a 5S model to evaluate a business in terms of sustainability, scalability, soundness of promoters, sustainable competitive advantage through strong brand promotion, and sustainability of cash flows. They look at investing in high-quality companies with differentiated businesses.

Risk is constantly monitored by adhering to internal stock and sector limits. In addition, they also limit the total share of the free float of a company held as a fund house.

The fund adopts a multi-cap strategy. The portfolio is slightly concentrated at a sector level and can tend to deviate significantly as compared with the fund’s benchmark weights.

Read the brief research synopsis here

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Source: Morningstar India Website