Shreyash Devalkar, Head Equity, Axis Mutual Fund
Some fund managers aim for consistency, and take a middle path, as far as performance goes. This fund tends to be top quartile or bottom quartile. It excels or is in the doldrums. I am not saying either is right or wrong or good or bad. But is this the essence of the portfolio structure? Is this what investors must expect?
Our portfolio has a bottom-up approach where we are more titled towards certain segments or sectors. By virtue of our philosophy on ‘Quality and Growth’, some of these companies have traditionally been expensive. Now, relatively speaking, they may not be that expensive. Post Covid, there were certain segments which were 10 or 12 PE (Price to Equity) ratio, and for several reasons, these segments have performed well. In the past few years, some of the value midcaps have seen substantial re-rating as reflected in PE expanding from 10-12 to 25-30, in certain cases.
On our front, we have made changes. For instance, we have introduced multiple companies in exports and capital goods. There has been a sharp rally in certain themes like PSU/power, which hit us, where we were having less exposure.
When it comes to performance. We aim to start with the kind of companies to own based on assessment of Quality and Growth potential of the company. In certain markets, they have been rewarded disproportionately. In other markets, they have not done so well.
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In which markets do your funds do well?
Historically, we saw periods of outperformance from 2018 to 2020, while following years have been relatively challenging for us.
In the past few years, the market has rewarded relative value. It was observed that relative value stocks in segments like power, PSUs, mining has relatively outperformed. In the entire Value vs. Quality / Growth spectrum, there are shades of grey; it is not always black and white. On that spectrum we have been on the Quality / growth side the segment which underperformed. When it comes to bulk of our holding, we believe we select quality stocks based on parameters like corporate governance, RoE (Return on Equity), capital efficiency and free cash flow over cycles, within universe. Though, there are always few stocks in portfolio where turnaround is expected.
In the last decade as well, we saw periods of underperformance, and then period of outperformance in these companies. We intend to stick to our way of working, which is essentially quality and growth, in past over a period of time, it has delivered.
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Tell me about your position sizing. With IPOs or listed stocks.
In this fund, we are very diversified. We don’t tend to take individual stock bets of more than 5% of the portfolio, unless there is an exceptional case. In fact, on average we would be around 1.5% going up to 3%. Essentially, there is no ideal way of sizing the number of stocks or the allocation to each. There are many factors at play.
One metric we use is to understand how many stocks from the universe are chosen for the fund. For example, in case of midcap universe, viz 150, a 30-stock portfolio is highly concentrated since its just 20% selection from universe. While in the case of large cap fund, the universe being 100 stocks, a 30-stock portfolio is 30% selection. The large-cap benchmark is very concentrated in a few stocks. The mid-cap benchmark is very diversified.
Naturally, the higher weight will depend on the return potential of the stock. But then we look at liquidity too. At high exposure as in a fund, say 5%, we tend to assess how much of the company, of the free float will we end up owning. These assessments help us in managing risk.
For the sake of an example, let us assume a small-cap company that has a market cap of Rs 2,000 crore. Depending on the size of the fund, 1% of the fund allocation can end up being 5% of the company ownership. This is an extreme example, but it explains the liquidity risk.
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Why do you have a substantial large-cap allocation here?
In this fund, I have around 30% to 40% of the mid-cap universe. So around 60 stocks at this moment (as on Nov 30, 2023), which comprise about 65%+ of the midcap exposure. There is also 35% leeway to invest in small caps or large caps. So, we also have a significant allocation to large caps in this fund. Most of these companies which are currently large cap, were invested earlier when they were mid-caps, and have now become large caps.
Historically, Financial Services have performed better when compared to mid-and-small-caps in this space, which is why we are actively in Financial Services in large caps. Our cash is around 5% or 7%. The cash allocation doesn’t concern me because what I hold in 80% of the portfolio determines the outcome.
Disclaimer
The views expressed by the fund manager are individual in nature and meant purely to information sharing. The Stocks mentioned above are used to explain the concept and is for illustration purpose only and should not be used for development or implementation of any investment strategy. It should not be construed as investment advice to any party. The stocks may or may not be part of our portfolio/strategy/ schemes.
Past performance may or may not be sustained in future.
Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.
Market caps are defined as per SEBI regulations as below: a. Large Cap: 1st -100th company in terms of full market capitalization. b. Mid Cap: 101st -250th company in terms of full market capitalization. c. Small Cap: 251st company onwards in terms of full market capitalization.
This document represents the views of Axis Asset Management Co. Ltd. and must not be taken as the basis for an investment decision. Neither Axis Mutual Fund, Axis Mutual Fund Trustee Limited nor Axis Asset Management Company Limited, its Directors or associates shall be liable for any damages including lost revenue or lost profits that may arise from the use of the information contained herein. No representation or warranty is made as to the accuracy, completeness or fairness of the information and opinions contained herein. The AMC reserves the right to make modifications and alterations to this statement as may be required from time to time.
While utmost care has been exercised while preparing this document, Axis AMC does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Investors are requested to consult their financial, tax and other advisors before taking any investment decision(s). The AMC reserves the right to make modifications and alterations to this statement as may be required from time to time.
Axis Mutual Fund has been established as a Trust under the Indian Trusts Act, 1882, sponsored by Axis Bank Ltd. (liability restricted to Rs. 1 Lakh).
Trustee: Axis Mutual Fund Trustee Ltd.
Investment Manager: Axis Asset Management Co. Ltd. (the AMC).
Risk Factors: Axis Bank Limited is not liable or responsible for any loss or shortfall resulting from the operation of the scheme.
