Why is Axis MF improving its performance? Its CIO explains

With a clear-eyed approach to market analysis, Ashish Gupta has made objectivity his North Star. "Markets and media shouldn't influence our views of companies or stocks," states the CIO of Axis AMC, who gained recognition for his prescient 'House of Debt' report at Credit Suisse nearly 12 years ago.

Since taking the helm at Axis AMC two years ago, Gupta has drawn on his three decades of experience to transform the fund house's strategy, research and risk management. Rather than managing funds directly, he focuses on ensuring the investment team doesn't allow any single theme to dominate their portfolios while giving fund managers independence to express their unique styles.

In this interview, Gupta shares his perspective on the recent market correction, the challenges of finding quality at reasonable valuations and his plans to close the AUM growth gap with other top fund houses. Below is the edited transcript of our discussion.

From analysing India's debt crisis at Credit Suisse to becoming CIO at Axis AMC, what's the biggest lesson that still guides your decisions?

Over the years, I have realised that it is critical to remain objective. In today's world of media overload and social media, maintaining objectivity is more crucial than ever, as everyone is exposed to the same news and information simultaneously. With the herd mentality taking over rational thinking, this often leads to similar thought processes and reactions. Therefore, it is essential to keep analysing data objectively.

Even in my report 'House of Debt,' published nearly 12 years ago, I didn't have access to any unique data; it was the same information available to everyone else. However, I looked at it more objectively for what it was rather than just glossing over it and assuming that a big conglomerate would never face any issues. The same principle applies even today; we shouldn't let markets and media influence our views of companies or stocks. We must also remember that cycles have ups and downs, so it's important to stay calm and patient. Don't get swept up if everyone is chasing a stock, or don't throw in the towel when everyone just sees doom and gloom. Being calm, patient and believing in your conviction are the most critical elements of doing better for success.

As CIO, you oversee strategy instead of managing funds directly. Why do you stay in the strategist's chair, and do you ever see yourself managing an equity scheme?

At Axis AMC, we are incredibly fortunate to have a talented team of fund managers. We have 10 equity fund managers, each doing an excellent job making my job easier and allowing me to focus on strategic decisions rather than stepping into fund management.

When I came on board two years ago, we decided to structure our investment team in a manner that no single theme dominates our portfolios. We manage 24 different schemes, each with a slightly different mandate, and we want fund managers to stay true to the scheme label. I think it is crucial that each of the funds reflects the personality of the fund manager. While we adhere to shared beliefs and core principles as a team, we also grant each fund manager the independence to run their schemes in their own style. Our style across funds or our overall approach emphasises quality and growth, but different fund managers can have their own interpretations of growth. For instance, one fund manager may focus on both quality and growth through consumption, while another might target both capital goods and real estate. My goal is to ensure that all the investment decision-making across the funds is guided by common principles rather than second-guessing the fund manager.

While top fund houses grew AUM by 45-75 per cent in the last two years, Axis AMC's 35 per cent growth trails behind. How do you plan to win over investors and close that gap?

I think it's a journey. We need to ensure that we provide a consistent and rewarding investment experience to the investors. At the same time, we also need to ensure that the performances, along with the strategies and thoughtfulness for each of the funds, are communicated eloquently to the investors and the distribution community. I want investors to understand the fund manager's thought process.

For instance, our flexi-cap fund exhibits a more aggressive positioning than our ELSS fund. Therefore, investors should not have differing expectations. In a rising market, the flexi-cap fund can potentially do better than the ELSS fund, but the latter will do better in a more conservative market.

On an overall AUM basis, we have been slightly less visible in both hybrid funds and passive funds. That said, our Balanced Advantage Fund is now in the top quartile on a three-year and five-year basis, but it is not something we have showcased consistently over the past many years. We aim to bridge this gap by gaining new market share in the hybrid and passive segment.

With Indian markets off 12 per cent from their 2024 peak and certain stocks - especially in small-cap and high-beta spaces - tanking 40-50 per cent, are we looking at a red flag signalling deeper trouble, or is this just a noisy correction?

Firstly, it is important to highlight the different narratives in the market regarding large versus mid and small caps. It's not always right to contextualise everything in these cohorts. Examining the valuation and identifying areas where growth has disappointed is crucial.

For instance, if we look at the top 20 stocks of Nifty 50, the multiples were at a discount to their historical ranges, as in the past two years, growth was limited, and these sectors and stocks derated. Conversely, many cyclical stocks, or the small caps, had rebounded forcefully after the Covid crisis and were growing earnings at nearly 28-30 per cent CAGR; they had been rerated, which led to a significant expansion in multiples.

Whether it is a large cap, mid cap, or small cap, wherever there has been a disappointment in growth and the multiples were elevated, we have seen significant corrections. I believe that this outlook is likely to persist in the future. There is some rebound in the economy underway, but it is unlikely that we will go back to a growth rate of over 7 per cent this year. So compared to the last two or three years, the earnings growth will be much more modest. From 2021 to 2024, earnings growth across industries was around 18 per cent. This year's earnings growth for the Nifty will be down to about 7-8 per cent, and next year's earnings growth is forecast to be around 13 per cent. Now, because of the slower pace of earnings growth, it is natural for the multiples of the previous years to be unlikely to come back.

That said, India's growth story is still intact, and we may see 6.5 or 7 per cent growth over the medium term. However, we have experienced excessive earnings growth and market returns over the past few years. Given the elevated multiples and modest earnings growth, I anticipate a period of much more moderate returns in the future. The good news is that this is primarily a P&L (profit and loss) issue, not a balance sheet problem. So, if I look across corporate India, there is no significant debt overhang across any companies. If I look at the banking or the NBFC sector, there are no pockets of vulnerability or asset quality mismatches, as we saw in 2018-19. As such, I don't see a challenge in the fact that there is a leverage issue anywhere in the system, including the stock market. So the system overall is very healthy. I do not anticipate any major accidents, but we need to ensure we get back to mid-teens earnings for corporate India. Once we reach that point, the investment returns of that magnitude will follow.

With valuations stretched in some pockets, how are you finding quality businesses that still offer value?

It's a challenge. I believe, fortunately or unfortunately, valuations are expensive regardless of the quality of a business. I think it is challenging to find quality or growth businesses at reasonable valuations across sectors. We are also trying to differentiate among companies by how much value they add - whether through the product or the process they provide and how competitive they are.

This is becoming increasingly challenging due to tariffs coming in. Their margins were elevated due to Indian industry having increased protection over the last seven years, and that may no longer be a viable option going forward.

We also focus on identifying companies with the potential for significant earnings growth, particularly those with longer-term visibility. While the valuation may not be cheaper for company A versus B, if we are confident of the earning trajectory of company B for a longer period of time, we might look at it. Your question is very pertinent: even after this correction, no company with deeply valued, high-quality growth is available in the market.
Also read: 'We have our portfolios biased towards large caps'