'Our quality bias got rewarded'

While markets have been on a upswing for the better part of the last 3-4 years, the last six months have been marked by a significant shift. Investors have rewarded quality stocks, and dumped those whose high valuations were not backed by fundamentals. As a result, equity funds with a quality bias have outperformed. A case in point being the Axis Focused 25 Fund and its high conviction compact portfolio strategy. The 8-year-old fund is ranked number 1 on both one-year and three-year period among all multicap schemes. In an interview, Jinesh Gopani, Head - Equity, Axis Mutual Fund tells Kumar Shankar Roy about the fund's portfolio construct, stock picking strategy, the rationale behind top holdings and much more.

What is driving the performance of Axis Focused 25 Fund?
The interesting fact is that we have followed the same philosophy and stock selection approach that we have been following since the inception of Axis Mutual Fund. Talking about last one year, majority of the stocks have been the same with minor adjustments in the portfolio. Around 70% of the corpus is still invested in these stocks. Hence, the key factor driving our performance has been our underlying philosophy of buying in fundamentally good quality and high earnings growth stories rather than betting on short term momentum. It is only in the last 6-8 months that the beta rally broke and all the companies which couldn't justify their high valuations with underlying fundamentals crashed and our philosophy of quality bias got rewarded by market.

Despite being a multi-cap fund, was it a conscious decision to always stick to giant and large caps? And, was it why you have relatively less exposure to mid caps?
The fund runs a high conviction compact portfolio strategy. In such a strategy, stock concentration is higher than other diversified strategies, active share against the benchmark is more and so is the tracking error. It is very critical to manage risk while maintaining liquidity in such portfolios. Keeping all this in mind, we invest at least 90% of the equity exposure in top 200 companies. Now, as per SEBI definition of market cap, only top 100 are large caps and next 100 would fall under midcap category. Apart from this, we are still left with 10% of equity exposure which may be outside of top 200 companies. Considering this, the portfolio has the leeway to be well diversified across market cap. On an average we hold 60-70% in large caps while rest in mid and small cap companies.

Consensus earnings estimates for the Nifty have fallen since the start of the current fiscal year. How are you approaching stock picks for your portfolio in this backdrop? Are there trends in sectors or is it very stock-specific?
If you notice, it is only 6-7 stocks out of 50 stocks in Nifty that have pulled up the rally in the market in the recent past and got the index to touch its all-time high levels. It has not been a broad based rally. Such a scenario calls for a sound stock picking expertise to outperform the market as a whole. At Axis, we diligently follow our clearly defined investment process and focus on bottom up stock selection approach with a quality bias. Having said that, some of the sectors have also done really well in the recent past which has helped our performance; private sector banks, niche NBFCs, Auto & Auto Ancillaries and consumption theme to name a few.

Many fund managers believe that a concentrated strategy works best if the corpus size of a fund is small. Your fund is already over Rs 4700 crore. Will a doubling of size from here be an issue for your focussed strategy?
Key concern here is liquidity. If one can manage the same, then up to a certain level, size should not be an issue. One way to handle the same is by managing a proper mix between large and midcaps. Add to that, keeping the quality meter of the company on the higher side makes it more tradable and hence increases overall liquidity of the portfolio. We focus on both. So far, we don't see any significant risk with 25 stocks with the size of the fund we have. Over a period of time when the corpus of the fund grows, we might look at increasing the max no of stocks in the portfolio to 30 which is the max limit as per the criteria under SEBI scheme consolidation for focused funds category.

What is the selection criteria for stocks in your portfolio? What kind of stocks do you always avoid?
We concentrate on high quality stories with a long term view as such stories are able to sail through market ups and downs while containing volatility. We tend to stay away from any momentum or hope stories without any support of underlying earnings or fundamentals. Adding to that, we have always stayed away from highly cyclical and highly regulated sectors or stories. Market has rewarded our philosophy and helped us earn superior returns.

Out of your top 10 stocks, you have 3 banks, 2 NBFCs, one each from IT, Auto and Cement etc. Will you share your thinking behind the fund's top holdings?
Private sector banks, niche NBFCs, Auto & Auto Ancillaries and consumption theme sectors have done really well in the recent past.

Consumer lending and financialisation of savings present long-term growth prospects for Indian equity market. However, valuations have moved up significantly, which makes us selective in stock picks. For corporate lenders, we expect stabilisation of asset quality issues leading to turnaround in earnings growth and profitability.

In Auto & Auto Ancillaries, we expect healthy earnings growth driven by structurally strong domestic consumption and improving rural demand.

With the Sebi categorization in place, it is said that the multicap fund category is best placed among others because of the apparent freedom to construct a portfolio. What are your views on that?
Well, I would not completely agree. With SEBI categorization, the long awaited uniformity in domestic mutual funds is here to bring all the fund houses on a level playing field. However, the investible universe is still very large with number of listed companies being in thousands which gives enough freedom to the fund managers while constructing portfolios. From category perspective, apart from multicap category, focused and ELSS category under equity schemes does not have too stringent limits to work with. The entire hybrid range of schemes, starting from conservative to aggressive, complete liberty of portfolio management within equity portfolio lies with the fund manager. We believe that Indian MF industry has a strong track record of delivering alpha, but a poor track record of offering simple and easy to understand products for investors. With the recent SEBI intervention, the latter problem is drastically rectified without - according to us - removing the former benefit.

New investors often base their expectations seeing historical returns. Axis Focused 25 is a top fund. What would be your message to new investors who are only looking at your present performance? What more should they look at?
Currently, the market valuations are high and earnings acceleration is required to sustain or pull up these levels. Rising oil price, rising inflation, fiscal uncertainty and doubts around upcoming election outcome are adding to the volatility in the equity markets. We expect this volatility to stay elevated for the next 6-8 months. I would like to reiterate the most common yet important disclaimer: "Past performance may or may not be sustained in future. Mutual funds are subject to market risk". My sincere advice for a new investor would be to allocate not more than 40 to 50 per cent of their investment through lump sum while the rest of the money can be staggered over next 12 months. If it is an existing investor, SIP (Systematic investment plan) in equity schemes is the way to go. We believe in India growth story and our long term view on Indian equity markets is positive and we urge investors to invest with a longer time horizon in mind.