Widely read:
Initially a software engineer, Ashish Naik gradually found himself inclined towards the management side of things. Following his calling, he pursued a management degree, followed by a nearly decade-long stint as a research analyst, first at Goldman Sachs and later at Axis Mutual Fund.
Since 2016, Naik has been serving as a fund manager at Axis AMC, where he currently manages around 18 schemes across various categories. Notably, he co-manages the fund house's two largest schemes - Axis ELSS Tax Saver and Axis Bluechip Fund - which have a collective AUM of around Rs 71,600 crore with Shreyash Devalkar.
In this interview, the software engineer-turned-fund manager sheds light on his investing style, the factors driving the market's current bull run and the steps he is taking to improve the performance of the Bluechip and ELSS funds. Edited excerpts:
You're a software engineer who started at Hexaware Technologies. What motivated your shift to the equity markets?
My background lies in science, technology, mathematics and the quantitative side of things. This naturally led me to pursue a degree in computer science and a career as a software engineer. While working in IT, I witnessed firsthand how technology is a powerful driver for businesses, but it's not the sole factor. Strong leadership, from project managers to CEOs, also plays a crucial role. Fascinated by the strategic side of business, I decided to pursue a career in management.
During this time, I had the opportunity to work with US-based MNCs (multinational corporations), which further broadened my perspective on business operations, particularly within the US finance and management landscape. My management studies shifted my focus from the specifics of IT and project management to a more finance-oriented approach. I began to analyse businesses through the lens of vision, strategy and macroeconomic trends while also considering quantitative and financial data. This unique blend of abstract concepts and concrete data sparked my interest in finance and eventually led me to transition into financial analysis. This experience likely ignited my current passion for equity markets.
You have been a research analyst for nearly 10 years (2007-16), first at Goldman Sachs, followed by Axis Mutual Fund. What are some of the key lessons you learned during this period?
When I joined Goldman Sachs after completing my management degree, I was an associate on the banking team. I worked as a banking analyst on the sell side for around two and a half years. This role was crucial as it required me to comprehend the impact of the economy and its various sectors on the overall health of the banking industry.
Later, I joined Axis Mutual Fund and was the only analyst on the team; there were just three other fund managers. As the sole analyst, I covered a wide range of sectors. So, regarding coverage, the transition from a sell-side to a buy-side analyst is much broader. Sell-side analysts probably look at a smaller set of stocks and analyse them more deeply across a single sector. But when it comes to the buy side, the stocks in the sector increase, and team sizes are generally smaller.
Over time, I also had the opportunity to cover many more sectors like Cement, Agrichemicals, Autos, Logistics, Metals and Pharma. This allowed me to learn about these sectors better, become familiar with them and expand my understanding. In the realm of buy-side research, there is a crucial element known as 'skin in the game', where a given recommendation frequently finds its way into the funds. To that extent, there is obviously a responsibility to be correct. It is also essential to know who is executing the strategies, how the promoters and senior management are doing and what the competitors are doing. What I've learned is that strategy is crucial, but it's also essential to comprehend a business's potential, its past and potential future evolution.
How would you describe your investing style? Are there specific types of stocks or scenarios that catch your eye?
I think it's more about building on what an analyst learns. I was fortunate enough to examine both cyclical and structural sectors, which gave me an understanding of how to evaluate different companies. Some sectors may be less cyclical, requiring us to analyse their business model in a more stable state and consider its potential for continuous growth.
The other category pertains to cyclical industries, where companies tend to perform better during periods of economic growth and less so during other times. Both of these strategies were instrumental in helping me build funds and create portfolios that could incorporate a combination of both approaches. During my initial period of fund management, I employed a multi-cap strategy that required me to diversify my exposure across large-, mid- and small-cap companies.
Secondly, when I initially began managing funds like the Axis Innovation Fund and the Axis Business Cycles Fund, each necessitated a distinct investment approach. We searched for companies in the Innovation Fund that demonstrated innovation in their processes, technologies or business models. These changes can occur gradually over a more extended period in various industries or be significantly disruptive over a shorter period, particularly from a newer entrant such as a new-age economy. The fund must take into account all these factors.
However, the Axis Business Cycles Fund, being cyclical, aims to identify companies or sectors that have the potential to thrive over a 2-3-year period. It's more of a top-down approach where you're trying to find out how the economy is doing and how some sectors can do well in such an economy, so it's more about sector rotation.
As you can see, I was able to manage and understand both of these styles effectively. This is also good for Axis Mutual Fund because we like companies with a decent track record of growth, are stable as far as possible and have decent visibility on cash flows and ROCE (return on capital employed).
Since 2021, Axis Bluechip Fund and Axis ELSS Tax Saver Fund have struggled. What steps are you taking to improve their performance?
As mentioned earlier, these funds had a tilt towards quality and growth in the past. Most investments in them were made in consumption-driven sectors for a long period. So, while quality remained prominent in the market, we have seen more growth ideas across various sectors that have emerged in the last few years.
We have also shifted our portfolios towards more growth-oriented names and have gradually incorporated them. You can observe these changes month over month and year over year in our portfolios, which now include consumption names and diversified stocks from various sectors. We are gradually observing that this diversification has significantly benefited our other funds, which are relatively easier to adjust due to their smaller size. However, the changes have been gradual in both these funds, and the benefits are also becoming slowly visible.
Recently, the Sensex breached the 80,000 mark. What is your assessment of the market, and what factors are primarily driving its performance?
From an economic point of view, things are and have been decently moving in terms of macroeconomics, fiscal and monetary policies and the fact that there is a certain level of continuity seen from the policy front that the market has appreciated. Risks such as geopolitics and the uncertainty resulting from global political changes will undoubtedly persist.
Over the past few years, India has witnessed the emergence of newer sectors, which likely gained popularity after being absent for nearly a decade. The government's spending, newer policies and PLI (Production Linked Incentive) initiatives have brought these sectors to the forefront. Therefore, we are witnessing a new wave of development in various mid- and small-cap sectors, with some of these developments also evident in large-cap companies. Overall, this has driven the market towards new highs. Even domestic investors, who have consistently entered the market, have played a significant role in this story.
While it's true that Indian valuations are among the highest, a closer examination of growth parameters, as well as ROEs (return on equity) of large-cap companies, reveals a notable positive difference compared to their emerging market counterparts. To that extent, India stands out on both fronts when we compare valuations versus the emerging market peers. Therefore, not all stocks have reasonable prices; many are at significantly higher valuations. If earnings and growth disappoint in these segments, one has to be careful and selective about where they place their bets in this environment.
What emerging themes or sectors in the stock market are you particularly excited about, and how are you positioning to benefit from them?
One of the biggest themes that we, as an economy, are experiencing is the change from being service-driven to becoming manufacturing-driven. The last decade was mainly about consumption; this decade will be a mix of consumption and investments.
Regarding investments, numerous options are available in both the capital expenditure and infrastructure segments. Large-scale manufacturing plants are not comparable to service facilities, which primarily require utilities and human resources. A wide range of infrastructure setups are needed for the manufacturing sector, including power utilities, water supplies, port and road connectivity. Plus, establishing a mobile or auto manufacturing unit will also necessitate a variety of ancillaries, leading to a multi-faceted growth story.
Obviously, these are slightly longer-term, which explains why many stocks in this space appear to be quite expensive in the near-term multiples. So, if they maintain their current growth trajectory and continue to guide and achieve higher targets, they have the potential to provide higher returns. Therefore, I am confident that this narrative has the potential to endure for a decade or more. These are some of the market's most significant changes and themes, driving numerous sub-themes or sub-sectors.
In the past few years, we have seen how higher-end consumption has picked up quite well, and there has been a K-shaped recovery in the economy. At some point, we should also see the lower part of the economy kick in. Furthermore, we can argue that increased spending in the rural sector has the potential to stimulate growth in several other industries. The third area to consider is the recent surge in real estate, marked by numerous launches. There are sectors that could potentially benefit from the growth in the building materials market. So, many industries look attractive from a medium-term perspective, too.
Also read: Interview with Dhimant Kothari of Invesco Mutual Fund
New episodes every Friday
