Axis Midcap had a stellar run in 2012 and then plunged into third and fourth quartile slots over the following 5 years.
Between 2013 and 2016, Axis Bluechip gradually slid from the first, to second, to third and eventually fourth quartile.
It will be wrong to blame senior fund manager Shreyash Devalkar for the chequered past of these funds since he joined the fund house only in November 2016. To his credit, Axis Bluechip put up a very impressive performance last year.
An emphatic growth investor, Shreyas speaks to Larissa Fernand of Morningstar on his investing style.
The definitions of growth and value are so fluid. In 2013, legendary value investor Bill Miller bet on Apple, calling it a value stock. What makes you think "growth"?
When the stock price falls there may be an illusion of value. The investor needs to wait for turnaround or some positive catalyst for the business, for the price to go up eventually. This wait could range from 4 months to 4 years or more.
In the last decade, we have seen that there are permanent or long-term disruptions in some business models due to technological changes / entry of competitors, funded by investors who are ready to bear near term losses for really longer term gains / high systemic NPAs / change in consumer trends like rising usage of natural ingredients/raw materials / or policy changes.
In all these cases, judgement of how long one needs to wait for turnaround, and visibility on that, is important to balance patience of all, as far as favourable risk reward is concerned.
Overall, the market rewards different styles over a period of time. What is most important is consistency in following a philosophy.
Our philosophy is Quality and Growth, which the market has rewarded over the past decade.
Then why have your funds not done well over the past years?
We look for high quality companies with high growth prospects. In 2016, the market was not conducive for such a strategy where high beta and low RoE companies did well. This affected our performance during the period. We did not have some of those companies as per our philosophy.
Markets are back in favour of quality and growth and we can see revival in performance of such companies – high growth and high RoE. The outperformance of these companies is getting starker in every small correction.
All fund managers say they do bottom-up stock selection. So tell me what parameters you look at for a stock to enter your portfolio.
We are biased towards high quality and growth with strong fundamentals.
Growth is quantitatively measured over cycles - industry specific (growth and penetration) and company specific (both sales and profit).
Quality is assessed quantitatively- RoE, cash flow quality, asset turnover, capital allocation – and qualitatively - corporate governance, pedigree and stability of management, and value creation for its stakeholders.
The competitive advantage, pricing power and right to win are underlying elements which one needs to assess crucially, since RoE, market share and leadership are the outcome of these.
You said you look at stability of management, for instance. In such a case, would you give it more importance in a smaller company than an established large cap?
Definitely! The stability of management matters for all companies.
During change in top management, most of the time we have seen that large companies have good breadth of talent which can take care of regular businesses till the time next leadership is appointed to take strategic direction.
So there is a difference in how you analyse a large- or mid-cap company?
We allocate more time researching the emerging companies. Visits to the company plants, talking to the promoters and management are more frequent with such companies. We also evaluate the company’s approach towards its stakeholders; not just minority shareholders but distributors, vendors, clients and employees. All this matters if a company is to witness sustainable growth.
Broadly when I view companies, I put them into three categories: Leaders / Challengers / Consolidators irrespective of the size. This helps me gain a better perspective of portfolio.
Leader I can comprehend. Consolidation would be Telecom and Airlines. Challengers?
What comes to my mind is any niche NBFC to a bank, or a company which creates altogether new category in the existing space or disruptors like tech companies. Most of challengers in the tech disruption space are unlisted.
What led you to have a high allocation to Financials?
Post demonetization, we believed that the financial sector would be a beneficiary of excess liquidity flowing into the system resulting in lower interest rates and deposits. The equity market also benefited out of it. That was our primary call.
Within that call, how did you narrow down to specifics and avoid public sector banks?
Growth.
Retail focused private sector banks and NBFCs have been growing well with RoE upwards of 15%. We prefer those companies that are B2C in nature. So whichever bank or NBFC has a higher retail exposure, we prefer it over a higher corporate exposure.
Not that PSU banks don’t have a good retail franchise, but when it comes to winning on the ground in terms of overall asset growth they are not growing as fast as private sector banks.
Prudent management has also been an important criterion.
You seem to be fairly liberal with your cash calls. You don’t believe that could hinder performance?
I don’t take active cash calls; they are more incidental in nature. It could be due to sudden inflows or because I have sold a stock. I won’t deploy the cash for the sake of doing so, I will wait for an opportunity that makes me comfortable enough to invest in.
If the market rises, the 10% cash allocation would not restrict outperformance and neither would it provide much of a buffer in a falling market. The balance that is invested - 90% of portfolio, matters more for overall performance.
