Nivesh Mitr talks to Jinesh Gopani, Head – Equities & Fund Manager of Axis Long Term Equity Fund (ELSS) about the fund’s investing philosophy and has it become difficult to manage the fund with AUM increasing to 18,000 Crore. Below is the entire interview –
Nivesh Mitr (NM) : What is the secret behind such a stellar performance of Axis ELSS?
Jinesh Gopani (JG) : Our core philosophy has always been to go in for a fundamentally good quality, high earnings growth story rather than playing momentum in the market. We have kept our long term focus intact with quality bias and high growth prospects. Such an approach of ours has enabled our portfolios to ride out significantly volatile periods of the market. This can be verified from the factsheets.
If you compare our factsheet now and 5 years back,you will find 22 (out of current 36) stocks common.
So, irrespective of market conditions, we have held on to our investment philosophy which got rewarded over time.
NM: What is the stock selection criterion for the fund?
JG: At Axis, we primarily follow bottom-up stock selection approach with a minimum 2-3-year view on stocks. Bias towards high quality and growth with strong fundamentals are the key look outs for our fund managers to select companies for their portfolios. Our approach with quality has enabled us to navigate through pockets of pain in the market.
There are four principles that the investment philosophy at Axis is driven by. These are:
- Strong corporate governance/Strong promoter pedigree,
- Secular growth rate of the sector, which is anywhere around 1.5 to 2x of GDP;
- Strong business model, which demonstrates its pricing power in the product category and the business it is in, and ultimately
- Good ROE’s and cash flows
NM: Fund size has blown to 18k crs. Does such a big size pose challenges like running out of investment ideas? What are the pros and cons of managing a fund with such a large AUM?
JG: India is a huge market with umpteen opportunities and ideas. Adding to it is the flow of new companies getting listed. So far there is no question of running out of investment ideas. On size, we constantly review capacity for each of our funds, and the actual capacity number will evolve over time with growth in the market.
Amongst the variables that are considered for evaluating capacity include:
- Liquidity of stocks,
- Holdings in individual stocks, and
- The objectives of the investment strategy.
Based on analysis of these variables, the Axis Long Term Equity Fund is not currently capacity constrained and we still have enough room to accommodate more flows.
NM: Is it majorly a large cap oriented ELSS fund? Has the fund set any min & max asset allocation limits for large, mid and small companies?
JG: As per the mandate, we do not have any such restriction on market caps of the companies. However, we have always positioned the fund with balanced exposure in large, mid and small cap companies. The fund holds minimum 50% in large caps and rest in mid and small cap companies.
NM: 2016 and 2017 witnessed slowdown in performance for the fund. What is the reason behind it?
JG: Some of our challenges in 2016 were a function of our style not being in favour in the market as well as the impact of one-off events such as demonetisation. The market rally in that time was driven mostly by momentum, hope and beta without much support of underlying earnings. We tend to stay away from such stories. We continued to hold on to our high conviction long term bets. In due course, when markets reversed to the fundamentals, our philosophy was rewarded, yet again. Our long term numbers remain robust and we hope to deliver consistent and sustainable long term performance going forward.
NM: Any particular themes you are currently eyeing on?
JG: On the way forward, in our opinion, rural and consumption stories continue to remain attractive with a long term perspective. In the pre-election environment rural centric policies and political focus on the rural economy are likely to spur rural consumption. The consumption space offers opportunities in companies with high quality businesses, stable cash flows and steady growth metrics.
Such opportunities are available in consumption and auto ancillaries sector.
Also, retail focused banks and select NBFC`s offer significant prospects.
NM: Current portfolio of ELSS has a very small exposure in healthcare and pharma companies. What is your view on the sector?
JG: The businesses in this sector are impacted by pricing pressure. Companies have been striving to offset decline and have better profitability. The timing of approvals and evolving competitive scenario for products remain key parameters to track the US generics growth over the next 2-3 years. We remain positive on select companies with high quality business model and sustainable earnings.