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Why is Franklin MF Overweight in Telecom?

Category : Equity MF, Mutual Fund · by Nov 30th, 2019

In the last few months, Telecom stocks have been in news for all reasons. From Supreme Court ruling against the telcos to Vodafone declaring the biggest loss in corporate history. Between all the mayhem, one social media conversation caught my eye:

For the uninitiated, Anand Radhakrishnan is the Chief Investment Officer of Franklin Templeton Mutual Fund India. Of course, this tweet was a reply in his personal capacity.

Amongst the major mutual funds in India, Franklin MF has the highest exposure to telecom stocks. A word of disclaimer before we go any further. This note is not about stock selection or timing or fund manager’s ability or sector allocation or any such stuff. This note is trying to understand why is telecom so special to Franklin Templeton MF? Let us see the % exposure of Franklin MF to telecom:

Percentage telecom exposure in Franklin MF

The table highlights two points:

  • The AMC always had high exposure in telecom. In May’19, they increased the exposure substantially.
  • The said exposure is not limited to 1 fund or category. Funds across categories have increased exposure to telecom stocks in May’19.

To give a perspective in numbers, see the addition of Bharti Airtel in the month of May’19:

Similarly, this is the addition of Vodafone Idea Telecom in May’19:

Some crazy big numbers here but understand that share price of Idea Vodafone was in early teens in May’19 and that it has issued bonus shares in Apr’19. Looks like Franklin MF had fully subscribed to the bonus issue and also bought more shares from the open market.

Let us look at the performance of these two stocks:

Bharti Airtel:

  • No sales growth in last 5 years
  • Return on Equity is less than inflation (Bank FD looks much better in comparison)
  • Not surprisingly, stock price hasn’t moved anywhere in last 10 years

Vodafone IDEA:

  • Return on Equity is in deep red for 10 years
  • No sales growth to speak of
  • Stock has been a wealth destructor since 10+ years

I reiterate, I am not questioning the fund manager’s buy decision or timing. What I fail to understand is – how can such wealth destructive stocks be good for a variety of fund categories – from Large cap to Small cap and everything in between. From Focused, Sectoral, Hybrid and even Retirement Funds?

Nov’19 was a watershed month for telecom. On one hand, SC had given a body blow to telcos with some massive back payments. Then govt sweetened the deal a little by agreeing to delay it for another 2 years. But the sector is still in a deep ditch. On one hand are the massive capital costs. On the other hand, telcos have zero pricing power. We have seen that with the entry of Jio. Consolidations are usually better for an industry but not so in telecom. With just 3 players in the field, they still continue to bleed.

Franklin MF continues to hold substantial quantity of telecom stocks across fund categories. There is clearly no love lost even after they declaring some mind-numbing quarterly losses. I will be closely watching this space for further developments. What can investors do – if not already invested, then wait and watch seems to be the most logical thing to do. If already invested, there is always a prayer!

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