3 fund downgrades

HDFC Balanced Advantage Fund

  • Old Rating: Silver
  • New Rating: Bronze
  • Process Pillar been downgraded to Above Average
  • Category: Dynamic Asset Allocation
  • Read the brief analyst note

Manager Prashant Jain manages the fund as an aggressively managed balanced fund rather than a true dynamic asset-allocation fund. The fund’s equity allocation hovers in the range of 65%-82% of the portfolio. The fund’s performance will be largely driven by equity markets as the fixed-income portfolio is constructed in a way to provide stability to the fund.

Jain’s investment style has certain unique elements. On the equity side, his valuation-conscious approach leads him to invest in beaten-down segments of the market, which can go through prolonged phases of underperformance. His willingness to endure short-term pain has often exposed the fund to above-average volatility. He also has his biases, such as his affinity towards public sector units, especially banks. The segment, which at one time commanded stability, has become extremely volatile over the years, largely due to the rising nonperforming assets issues and concerns related to their management.

While this strategy has delivered pleasing results over the long term, it has not been able to fully adapt to changing market dynamics. Consequently, while the risk in the strategy has risen sharply, there are times when it has been found wanting in terms of generating commensurate returns for investors.

Franklin India Equity Advantage

  • Old Rating: Bronze
  • New Rating: Neutral (Regular), Bronze (Direct)
  • Process Pillar been downgraded to Average
  • Category: Large and Mid Cap
  • Read the brief analyst note

Lakshmikanth Reddy has been managing Franklin India Equity Advantage for over four years now and has brought the fund much-needed stability.

With the requirement of maintaining a minimum 35% exposure each in large and mid-cap stocks, this new approach does restrict the manager’s degree of freedom to some extent. Consequently, the exposure to mid-cap stocks in the portfolio has surged and it now accounts for almost half of the portfolio. While the investment style continues to be style agnostic; the emphasis on sustainability of growth rather than flashier momentum plays too continues. The intent is to identify companies with strong business models, durable competitive advantages, and quality management.

Lakshmikanth’s struggle with performance could also be attributed to the team’s broader investment style being out of favour for a long time now. In such a scenario, the execution needs to be better and there is a scope of improvement on that front. Until we see that happening, we downgrade its regular share class to Neutral, whereas its direct share class retains Bronze rating given its competitive expense ratio.

Franklin India Tax Shield

  • Old Rating: Bronze
  • New Rating: Neutral (Regular), Bronze (Direct)
  • Process Pillar been downgraded to Average
  • Category: ELSS (Tax saving)
  • Read the brief analyst note

Portfolio manager Lakshmikanth Reddy took over the reins of this fund from Anand Radhakrishnan in mid – 2016. Lakshmikanth is a competent portfolio manager who relies more on a fundamentally driven investment approach rather than short trends and is supported by a strong and experienced team.

Traditionally, this fund has been managed as a predominantly large cap offering investing 70% in largecap stocks and 30% in small/mid-cap stocks. This basic premise of the portfolio has remained intact even after Lakshimikanth took over its mantle.

Though Lakshmikanth maintains that he prefers running a style agnostic investment approach, there is an apparent valuation consciousness in his investment style. Despite having a higher large cap exposure in 2019 and this year, when mid-caps have struggled, this valuation consciousness has held the fund’s performance back, with value style being out of favour for a long time now.

The strategy could have been executed better since a style agnostic approach should have come in handy in such a scenario. There is a scope for improvement on that front. Hence, we downgrade its regular share class to Neutral, whereas its cheapest share classes retain Bronze rating.

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Source: Morningstar India Website