Axis Mutual Fund is one of the newer asset management companies - its first scheme was launched in October 2009. And its most popular one is Axis Long Term Equity Growth. In the six calendar years of its existence, this fund has been the best performer in the ELSS category thrice. The remaining periods it has been a top quartile performer.
Your tax-saving fund has been shooting out the lights. What worked?
We do not remunerate or motivate our asset managers on rankings. Their targets are linked to delivering a certain out-performance over the relevant benchmark. If they manage to do this year after year, our funds will automatically look good against any peer group.
If they aim for consistency, the risk profile of the portfolio goes down. Equity investing is not high risk equals high return in the medium to long term but rather reduced risk leads to improved returns. World over studies show that medium-risk portfolios eventually outperform high-risk portfolios.
Your mid-cap fund underperformed the category average sharply in 2015....
When investing in any stock, especially mid-caps, we take a medium- to long-term view on the company. There can be short-term volatility that we may have to suffer in the interim. In the recent past, we have seen some stock specific challenges in the mid-cap fund. So it is not a strategy related issue that has gone wrong but a stock specific issue.
Individual stocks can always surprise.
As asset managers, our job is to be able to react and make adjustments to our long-term hypothesis for them and act accordingly which is what we continue to do in the mid-cap fund and indeed for all our funds.
We buy good businesses with the conviction that the business will grow 15-16% over the next few years. In one year the business may grow 17% but the stock could be in the negative. Our fund managers work to generate alpha over a 3-4 year period.
Though 2015 was not a great year for our mid-cap fund, our strategy did not change. We are high conviction investors in quality businesses generating high ROE with management comfort. There will be periods when a particular strategy may not work. Different segments of the market will do differently at various time periods. At some time momentum stocks will rule. That is the nature of markets.
In the first quarter of CY2015, we felt mid caps were overpriced as compared to large caps and saw a lot of volatility and fluff in that segment. So we began to move the portfolio more into defensives. That too could have hindered performance.
Do you have a specific universe of stocks from which you make your picks?
Every year, a stock will experience a high and low with a 100% variation. So if the low is Rs 50, the high will be Rs 100. So there is the ability to make money on a trade. That is not what we are focused on. We identify companies which will build wealth. Wealth is created by high quality businesses which have pricing power. So we look at 300-350 business and from this universe we construct our portfolios.
What sort of stocks do you look for?
We look for high quality growth stocks at a good price. Over the past decade (2004-2014), the top 25 high quality businesses have outperformed the BSE100 every year by 10%. If the index grew 15%, these stocks grew 26%. Those in the bottom quartile lost 3% every year. So if an investor started with Rs 100, the index would have taken his investment to Rs 320, the top performers would have resulted in the investment being worth Rs 1,000 and the bottom performers – Rs 70. Our focus is generate long-term wealth building by following the characteristics of such companies. We look at businesses which will grow at 15-18% compounded over the next five years.
Our research team is trained to look at investment as an ownership decision. We work with a private equity mindset. We don’t want the mindset which says Company X is trading 14x but Company Y is trading 16x and then make a decision based on that. Our decisions are not anchored in relative comparison but on research which will tell us what the business is worth. That is why we bought a number of new investment ideas ahead of other institutional investors.
What is the biggest USP of Axis Mutual Fund that makes it stand out in this super competitive industry?
Our risk management framework is our most prominent USP. Our partner – Schroder has favourably compared our risk management framework to global practices. We look at five risks for any stock and all are tracked and controlled and inbuilt within the investment framework. That is why all our portfolios have much lower absolute risk levels than the benchmark and yet we outperform.
We offer low risk, high return and execute it efficiently within the strategy. Our analysts are trained to look at the upside in the next one year and the possible downsides. We ask: Based on our analysis of the downside probability, are we comfortable with the upside we are looking at or should we be targeting higher?
We look at a number of risk parameters on a portfolio basis including tracking error, volatility and beta. Further we are one of few fund houses that maintain a liquidity target for our portfolios.
There is a misconception in the industry that funds get sold based on the charisma of the fund manager. Our approach is institutionalized. We have a differentiated platform which is geared to create alpha.
We have been true to our philosophy and strategy and the performance is there to see.
A version of this interview appeared in the online publication of India Markets Observer. The outlook for various asset classes, perspectives on the industry, investing insights, interviews of fund managers, and the entire list of contributors, can be accessed here.
