How do you pick stocks for this fund?
At Axis Mutual Fund, we primarily follow bottom-up stock selection, with a minimum view of two-three years on the stocks. A bias towards high quality and growth with strong fundamentals are the key look-outs for our fund managers.
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Four principles drive the investment philosophy at Axis Mutual Fund: (1) strong corporate governance/strong promoter pedigree; (2) secular growth rate of the sector, which should be anywhere around 1.5 to two times that of GDP growth; (3) a strong business model, which demonstrates pricing power in the product category and the business a company is in; (4) good ROEs and cash flows.
When do you sell a stock?
Change in business fundamentals is the primary reason for selling a stock. This includes changes in competitive advantage, capital-allocation decision and corporate governance. We believe that instead of using absolute valuation as a metric, it's the relative risk-reward metric that matters more.
Your fund has a one-year return of about 6 per cent. This at a time when the market slid. Was a shift to large caps the reason behind your performance?
Mid- and small-cap stocks had a stellar run for two-three years before the recent fall. The valuations were at peak, pricing in the re-rating. At a fund-house level, we were uncomfortable with the valuations that some of these companies were trading at and hence took a prudent decision to stay away from them. In general, our portfolio-construction process aims at a focused portfolio based on the investment mandate of the fund. So, it's the combination of our market view and sticking to investment mandate of the fund that led to the reasonable performance by the fund.
As much as 96 per cent of your current portfolio is in large caps, which makes your fund effectively a large-cap fund at the moment. When do you plan to add mid and small caps to the portfolio mix?
In Axis Multicap Fund, we intend to have 50-100 per cent of AUM in large-cap companies, with the rest in mid- and small-cap companies. The fund recently completed one year. Since the deployment of the fund, average large-cap exposure has been around 68-70 per cent. As on December 31, 2018, we have around 77 per cent (of AUM) in large caps and around 5 per cent in small and mid caps.
We are cautiously optimistic on markets in light of the market movements and the sentimental negative that sharp falls in specific sectors have caused. Currently, we are holding some cash position in our portfolio and will look to deploy it as the market stabilises. Our investment focus continues to remain quality-centric and we have positioned ourselves appropriately to manage such volatility.
Your portfolio P/E stands at about 40 times, which looks stretched. How do you see it?
Though large-cap stocks have traditionally enjoyed a valuation premium over mid-cap stocks, now mid-cap companies are also discovered and fetch their due multiple. However, mid-cap companies with less capital-intensive businesses, lower debt levels, nimble business models and those operating in niche spaces can deliver faster earnings growth than large caps and therefore may justify higher valuations. Currently, valuations are rich in the mid-cap space primarily because of liquidity. Earnings growth would be a crucial element for wealth creation.
As far as our funds are concerned, we follow quality and growth philosophy, and such companies fetch high valuations. Hence, PEG matters more.
What can investors expect from your fund over the next one year?
The markets have seen bouts of volatility over the last few months and currently offer reasonable valuations in select pockets. Knee-jerk reactions to news events are likely to remain a part and parcel of equity markets for the next few quarters. Investors are advised to deploy funds in a phased manner. Systematic investments in equity products could also help investors ride out short-term volatility.