At Franklin Templeton, our equity investment philosophy is anchored in a long-term perspective and a commitment to quality. Our rigorous, bottom-up research approach, coupled with a disciplined Growth at a Reasonable Price (GARP) strategy, ensures that we consistently identify and invest in companies with strong growth potential and sustainable competitive advantages. This article outlines our stock identification process, the benefits of thorough bottom-up research, and how our research team supports portfolio managers in delivering superior portfolio performance.
Our Equity Philosophy: The Foundation of Our Strategy
Our investment philosophy revolves around five core principles:
Long-term Approach: We focus on the enduring growth potential of companies, rather than short-term market fluctuations.
Institutionalized Process: Our research methodology is systematic and disciplined, ensuring consistency and rigor in our stock selection.
Bottom-up Approach: We prioritize the fundamentals of individual companies over macroeconomic trends.
Quality Orientation: We seek out companies with robust business models and strong management teams.
Growth at a Reasonable Price (GARP): We invest in companies with solid growth prospects that are trading at attractive valuations.
Stock Identification Process: The Q-G-S-V Model
Our stock selection framework is encapsulated in the Q-G-S-V model, which stands for Quality, Growth, Sustainability, and Valuation. This model ensures a comprehensive evaluation of each potential investment.
Quality: We assess the management’s track record, the business model, management guidance, and leverage. Quality companies have strong leadership, sound business strategies, and prudent financial management.
Growth: We analyze key financial metrics such as Return on Equity (ROE), Return on Capital Employed (ROCE), Return on Invested Capital (ROIC), and EBITDA. Scalability is crucial, as it indicates a company’s potential for sustained growth.
Sustainability: We evaluate the management’s vision, the variability, visibility, and predictability of earnings, and initiatives aimed at building a sustainable and profitable business.
Valuation: We employ various valuation methods, including Price-to-Earnings (PE), Price-to-Book Value (PBV), implied growth rates, and discounted cash flow analysis, to ensure we invest at reasonable prices.
The Benefits of Thorough Bottom-Up Research
A disciplined bottom-up research approach offers several significant benefits to our investors:
In-depth Understanding: It allows us to gain a deep understanding of each company’s intrinsic value and growth potential, ensuring we invest in high-quality stocks.
Risk Mitigation: By focusing on fundamental analysis, we identify potential risks early and take measures to mitigate them, thereby protecting investor capital.
Superior Returns: Our research-driven strategy helps identify companies with strong fundamentals, likely to deliver superior returns over the long term.
Supporting Portfolio Managers: The Role of Our Research Team
Our research team is integral to helping portfolio managers create and maintain high-performing portfolios. Here’s how our strategic focus areas contribute to superior portfolio performance:
Compounding Growth Ideas: We seek companies that are integral to India’s robust economic growth, can sustain high returns on equity, and demonstrate strong management capability. These companies exhibit recurring revenues and profitable reinvestment opportunities, supported by a track record of strong execution.
Cyclical Growth Orientation: We identify companies capable of generating positive cash flows and earnings growth at a rate faster than the industry or economy. These companies have sustainable competitive advantages and are valued reasonably compared to their peers.
Disruptive and Innovative Businesses: Our team identifies companies poised to benefit from disruptive changes within their sectors. We invest in those with the vision to capitalize on technological advancements, robust processes, and strong brand positioning to achieve long-term growth.
Contrarian Approach: We look for businesses with above-average ROE available at below-average prices. These companies have strong long-term fundamentals, good execution, and cash flow track records. Often, they possess hidden value underestimated by the market.
Conclusion
Our equity research framework is designed to identify and invest in high-quality companies with sustainable growth prospects. Through rigorous analysis and a disciplined approach, we aim to create long-term value for our investors. At Franklin Templeton, we remain committed to leveraging our research strengths to deliver superior portfolio performance and sustainable shareholder value.
By adhering to our principles and utilizing our comprehensive stock selection process, we continue to build portfolios that not only perform well but also withstand market volatility, ensuring steady growth for our investors.