Axis Long Term Equity Growth
- Date of Analysis: June 2017
- Analyst Rating: Silver
- Star Rating: 4 stars
- Investment Style: Large Growth
- Investment Process: High-conviction portfolio based on the team's ability to identify under-researched stocks
- Fund Manager: Jinesh Gopani
Jinesh Gopani has been managing Axis Long Term Equity Growth since April 2011 and has been able to execute the strategy with consistency so far. We think that he stands out as an efficient stock-picker. This is the largest fund in the Tax Savings (ELSS) Morningstar Category. Although the growth in fund size is consistently monitored by the fund house, we are wary of the pressure that it puts on existing resources.
Gopani looks for companies that have the capability to grow over a 3- to 5-year time period and places a lot of emphasis on finding quality names at reasonable valuations. The portfolio typically invests about 50% to 70% in large-cap names with the remaining portion of the portfolio invested in small- and mid-cap stocks. The team follows a detailed research process that aims to identify under-researched ideas. The portfolio is made up of Gopani's high-conviction ideas and has a distinct character. The portfolio is markedly benchmark-agnostic and typically shares a very low overlap of about 25% to 30% with the S&P BSE 200 Index. From a valuation perspective, the team tends to invest in stocks that are slightly expensive in relative terms as long as they meet its internal quality and growth criterion.
The fund has remained true to its mandate. Despite its recent short-term underperformance and the changes in the investment team, we think that Gopani is capable of turning things around. Our conviction in Gopani, his consistent and efficient execution of the strategy, and the positive long-term performance lead us to assign the fund a Morningstar Analyst Rating of Silver.
HDFC Tax Saver
- Date of Analysis: May 2017
- Analyst Rating: Silver
- Star Rating: 3 stars
- Investment Style: Large Growth
- Investment Process: A bottom-up approach to scout for quality stocks, with a long-term orientation
- Fund Manager: Vinay Kulkarni
- Vinay Kulkarni is an experienced and competent manager who is well-ingrained into the HDFC investment philosophy and has a reasonably strong track record.
The investment process is key to our favourable view here: Kulkarni plies a multi-cap approach, investing roughly 70% in large caps and the remaining in small/mid-caps. Like all managers at HDFC Asset Management Company, he places a lot of emphasis on understanding the business and has an inherent quality bias while investing. His portfolio holdings typically span a two- to three-year investment horizon. However, it isn't uncommon for stocks to feature in the portfolio for significantly longer time frames.
We think Kulkarni's focus on the long-term strength of a business is a positive and it complements the broader style of investing followed by the investment team at the AMC. While Kulkarni considers the opportunity cost of holding a stock over the long term, he does not tend to exit stocks solely based on valuations. Kulkarni also takes large stock and sector bets, often against the grain. We believe this is linked to the research-intensive approach and the caliber of the investment team, which helps pull off such a strategy. Overall, we are fairly impressed with his investment style and solid execution of the investment process. We also note that the process is well-defined and repeatable.
That said, certain risks associated with the investment process need to be highlighted. Kulkarni's sizeable high conviction bets can result in some underperformance over the short term. Nevertheless, we believe that over longer time frames when markets experience a full cycle, the manager's investment style and expertise will hold the fund in good stead. We therefore retain the fund's Morningstar Analyst Rating of Silver.
Franklin India Taxshield
- Date of Analysis: May 2017
- Analyst Rating: Bronze
- Star Rating: 4 stars
- Investment Style: Large Growth
- Investment Process: A research-driven investment approach with a focus on reasonably valued stocks
- Fund Manager: Lakshmikanth Reddy
- The fund is helmed by Lakshmikanth Reddy, who joined the fund company on May 2016, with R. Janakiraman as the named comanager.
While earlier it had a more definite mandate of investing around 70% in large-cap stocks and 30% in small/mid-cap stocks, it is now managed with a flexi-cap approach, which enables the manager to invest without paying heed to the benchmark index, market cap, or any specific style of investing. The change in the strategy is largely to align it with Reddy's skill-sets and to capture wider range of investment opportunities in the fund. Although the investment team has a reasonably good track record in running flexi-cap strategies, which is positive, it should be noted that it will also change the fund’s risk/reward profile going ahead. Further, the changes here have made the fund’s past track record less relevant.
Earlier, the fund’s Morningstar Analyst Rating of Gold was driven by our conviction in Radhakrishan’s managerial skills and his ability to execute the strategy with a good degree of precision. Reddy, on the other hand, shows promise, but his execution capabilities remain untested, which is critical for the success of this fund given the nature of its strategy. Hence, in our opinion, a downgrade here is inevitable.
That being said, Reddy's extensive research experience will aid him in his job. Furthermore, he is supported by a close-knit investment team that ranks among the best in the industry. We are fairly impressed with its disciplined investment approach and believe that it should hold the fund in good stead. Therefore, despite the downgrade, the fund merits a positive rating. Hence, we assign Bronze rating to the fund.
Reliance Tax Saver
- Date of Analysis: April 2017
- Analyst Rating: Bronze
- Star Rating: 4 stars
- Investment Style: Large Growth
- Investment Process: A concentrated fund that can vary its exposure across market caps
- Fund Manager: Ashwani Kumar
This fund is run by a long-standing manager and is distinct in terms of character.
While most ELSS funds maintain a multi-cap portfolio with a significant allocation towards large-cap stocks, Kumar can tend to invest substantially in small/mid-caps based on his conviction levels. Further, he runs a concentrated portfolio and can tend to invest in slightly less-liquid securities, given the 3-year lock-in period.
While picking stocks, Kumar typically seeks companies with strong growth prospects that he believes are trading at a discount to their intrinsic value. In effect, he attempts to balance both the growth and valuation aspects while investing. It comes as no surprise that this approach has led him to invest in the small/mid-cap space where markets tend to misprice stocks due to low coverage. When building the portfolio, Kumar typically takes sizable underweight/overweight positions versus the S&P BSE 100 Index and the Morningstar Category based on his conviction.
Clearly, the unconstrained approach provides the manager adequate flexibility to choose stocks and sectors from across the board. However, such a strategy’s success relies heavily on the portfolio manager’s ability to execute it skillfully.
The fund can tend to be driven by market cyclicality and outperform significantly in a mid-cap rally owing to its exposure in this segment. Having said that, the current portfolio reflects a higher allocation to large-cap stocks than it did prior to 2014. We are of the view that Kumar is far more adept at operating in the large-cap space rather than in small/mid-caps.
The fund’s blistering showing in 2012 and 2014 shows what it is capable of accomplishing when things fall into place. Overall we have a positive opinion on the fund and this leads us to assign it a Morningstar Analyst Rating of Bronze.
Sundaram Diversified Equity
- Date of Analysis: April 2017
- Analyst Rating: Neutral
- Star Rating: 3 stars
- Investment Style: Large Growth
- Investment Process: A well-defined process aimed at constructing a growth-oriented portfolio of high-conviction ideas
- Fund Manager: S. Krishnakumar
- Despite the presence of an experienced and capable manager at the helm, we’d like to see the investment team stabilise before we build more conviction on the fund.
Although the investment team is quite experienced, they recently underwent a restructuring process, with managers being assigned roles that reflect their areas of strength. While Rahul Baijal manages the AMC’s large-cap strategies, Shiv Chanani now manages flexi-cap strategies and Krishnakumar manages the fund's small- and mid-cap mandates in addition to his role as the CIO of equities. We think that the restructuring will yield positive results over the long term. However, we would like to evaluate the impact of these changes over a longer term before we build more conviction on the team.
The fund’s investment strategy has remained flexible, moving across market capitalisations. Its current exposure to mid-cap stocks in the portfolio ranges between 35% and 40%. However, this can change significantly based on its investment avenues. The fund is currently run with a slightly concentrated approach at a sector level with the manager deviating significantly from the index weightings.
This strategy has its own share of risks, and wrong sector calls by the fund manager can lead to substantial underperformance compared with its peers. While we have a positive view on the manager, we want to adapt a wait-and-watch approach until the team stabilises.
L&T Tax Advantage
- Date of Analysis: December 2016
- Analyst Rating: Neutral
- Star Rating: 5 stars
- Investment Style: Large Growth
- Investment Process: The focus is on companies that are efficient allocators of capital
- Fund Manager: Soumendra Nath Lahiri
The fund is managed by head of Equities Soumendra Nath Lahiri, who has about 20 years of experience on the investment side and has been managing or advising on portfolios for over 10 years.
The investment process aims to find companies through bottom-up stock-picking. However, the fund is prone to large underweight or overweight positions at a sector level given the benchmark-agnostic style of investing. The manager tends to invest in a lot of fresh ideas as a part of the portfolio. This can tend to give rise to a portfolio that is very distinct as compared with its peers. Risk management plays an important role in the process. Unlike Fidelity, which used to manage diversified portfolios of 70-90 stocks, Lahiri prefers running portfolios of 50-60 stocks. Stock concentration risk is avoided by maintaining a maximum individual stock exposure of about 6% in the portfolio.
In our opinion, the fund house has a good foundation in place since taking over Fidelity’s mutual fund business in India. The processes have been structured in line with the fund house’s goals and the investment team has remained stable. Nonetheless, we think it prudent to adopt a wait-and-watch approach and look at how the AMC builds on their existing processes and structure over the long term. Moreover, we would like to see the team work together over a longer period of time before we gain further confidence in the offering. Till then we give this fund a Morningstar Analyst Rating of Neutral.
DSP BlackRock Tax Saver
- Date of Analysis: December 2016
- Analyst Rating: Neutral
- Star Rating: 4 stars
- Investment Style: Large Growth
- Investment Process: The manager adopts an unconstrained and unbiased approach while constructing the portfolio
- Fund Manager: Rohit Singhania
Singhania took over this fund in July 2015. He joined the fund house’s PMS division as research analyst in 2005 and moved to the equity investment team in June 2009. He is not new to fund management, having managed the DSP BlackRock TIGER fund since June 2012. While Singhania is a seasoned analyst, over the years he has matured as a portfolio manager as well. However, it should be noted that he has a track record in managing the DSP BlackRock TIGER fund, which has a thematic bent.
Singhania runs this fund in line with its investment mandate, which allows him to adopt a fluid investment approach without any bias or restrictions in terms of stocks or sectors. In the manager’s own words, this fund doesn’t have a defined investment approach; this provides him the liberty to capitalise on any investment opportunity that he sees in the market, provided it makes a grade on his selection parameters. Consequently, the fund’s portfolio turnover tends to be on the higher side.
While an unconstrained process can be very rewarding, it is fairly risky, too. A wrong bet can lead to significant underperformance. Also, the absence of a rigidly defined method means investments are also made on a somewhat intuitive basis. Hence, it must be noted that the success of the investment process largely depends on Singhania’s execution skills. Although he has been in control of the investment process thus far, it’s a short time frame to build conviction. Under Maheshwari and Shah, the fund had a Morningstar Analyst Rating of Silver.
However, we would like to adopt a wait-and-watch approach for now and assign it a Neutral rating until we gain more conviction in Singhania’s investment and execution capabilities.
