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Investing in quality companies paid off, says Jinesh Gopani, head-equities, Axis Mutual Fund

Axis Mutual Fund was the top performer in 2018, and it is topping the performance chart in 2019 also.

, ET Online|
Updated: Nov 28, 2019, 10.20 AM IST
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jinesh gopani
ETMutualFunds.com recently came out with a list of fund managers who have created the maximum wealth for investors in the last five years. Read the story here: These mutual fund managers made the maximum money for investors in last 5 years.

The flagship equity schemes of Axis Mutual Fund - Axis Long Term Equity Fund, Axis Midcap Fund and Axis Bluechip Fund - have performed exceptionally well in the last five years. The fund house was the top performer in 2018, and it is topping the performance chart in 2019, too. Avneet Kaur of ETMutualFunds.com spoke to Jinesh Gopani, head- equities, Axis AMC, to find out how the fund house stays on top year after year. Edited interview.

The flagship equity schemes of Axis Mutual Fund have posted an impressive performance in the last five years. Axis Long Term Equity Fund has given the maximum returns in the tax-saving category for its investors in the last five years. Other schemes like Axis Midcap Fund and Axis Bluechip Fund have also done exceptionally well. How did you manage this feat?
I can say that we have been rewarded for the governance of our funds. Basically, there is a clean-up going on in the system: the auditors, independent directors, and the leading agencies have been pulled up by the ministry of corporate affairs for failing to do their job well. And this is essentially happening after the IL&FS crisis. You would have seen that there are questions about the governance structure in many mid cap and small companies.

Given the scenario, our philosophy of investing into good quality companies, run by a good management with a better governance structure, as compared to the industry, has really helped us in terms of holding onto the performance when other mid cap and small stocks were not doing well.

Also, given that 70-75% of the portfolio was a high tax-paying portfolio, we were one of the biggest beneficiaries when corporate tax rate cut announcement came. Most companies that were high tax-paying were rewarded in terms of returns in between 15-30%, depending on the sector and company.

Also given the 5% GDP growth environment, there are only a few companies which can deliver growth. And if you are a leader in that space, you will really get your share of growth and those companies have been able to deliver in terms of earnings growth as well.

The combination of cleaning up of the system and lower GDP growth helping only a few companies has really worked in our favour.

Axis Long Term Equity Fund has allocated over 68% to large caps. What is the strategy?
Ideally, once the GDP growth comes back to 7-7.5%, we would like to keep it as a multi cap strategy with 50% in large cap and 50% in mid and small cap. But given the current scenario of 5% GDP growth, only a few companies can deliver good numbers. As of now, we are at 68% in large caps. But ideally in the longer term, we would have 50-50 allocation.

Top holdings of these schemes include private banks and selected NBFCs. In fact, Axis Multicap Fund has around 40% of its portfolio in top four stock holdings, including Bajaj Finance, Kotak Mahindra Bank, HDFC Bank and ICICI Bank. This shows the fund manager has high expectations from them. Doesn’t it increase the risk of concentration in the scheme’s portfolio? Please comment.
Again, the problem has been if you see in the last three to four years, the broad-basing of GDP growth is not happening. The GDP growth has come down from 7.5% to 5% level and in the last three to four years there has been a significant financialisation of the economy that has taken place. So, more and more consumers adapting to an EMI kind of a structure and hence the finance as a sector has done well. I don’t know what will happen after five to 10 years, but given the domestic consumption story which is what India is all about, we still feel that some of the enterprises can deliver 15-20% growth rate.

What do you believe NBFC and banking space have in store for investors in the next 12 months or so?
I feel the space is good and once the economy starts showing signs of recovery obviously, these sectors will also do well along with other sectors over a period of time.

We can see mid and small cap stocks making a comeback. Given the current scenario, how has your strategy changed?
I think, even in last three-four years, good midcaps have generated numbers. If you drill down, the numbers are not coming only in those stocks in the NBFC space or bank space or other sectors like auto ancillaries and other economic sectors. I think wherever there are numbers, people are able to reward them nicely or wherever there are problems around corporate governance and hence the numbers are not coming by, people are not ready to buy them.

It will take some time for entire broader rally to happen. This will require 7-8% GDP growth when volume growth is high, and many companies can show good numbers.

A beta of less than 1 and downside ratio of less than 100 in the last five-year period for equity schemes of the Axis Mutual Fund show the funds managed downside quite well while generating decent returns. How did you manage it?
It is more of an outcome of if you have invested in a good company, the volatility will be less because there is a predictability of earnings and when there is predictability of the earnings, the beta of these companies tends to be lower. So, also if you are in a good enterprise, the volatility in terms of stock price movement reduces, there is stability in the stock and when the company keeps on delivering quarter after quarter, they get rated or de-rated, depending on how the numbers have come.

You have been managing Axis Long Term Equity Fund for a long period of nine years and nurtured it to become a consistent performer. Other schemes have been among toppers in their respective categories as well. What is the one thing in your 'not-to-do' list that helped these schemes to beat their benchmark and peers?
Frankly, we have a universe of stocks and we run a philosophy. Some of the companies which don’t fit in that philosophy of growth and ROE and cash flow measurement, we avoid those stories in our portfolio. And hence the portfolio concentration is very high. We have 30-35 stocks portfolio. We don’t run 70-80 stocks portfolio. And whosoever is not delivering on numbers, we try to avoid them. And some of the heavily regulated sectors like telecom or oil and gas, we avoid them because we don’t understand those sectors so well.

Consistent performance has turned many Axis schemes almost all-weather schemes. What would you like to tell the investors who have very high expectations from these schemes?
One thing I want to tell is that we should look for consistent and steady returns from Axis house over a period of three to five years. We are not day to day active traders in the market. Also, if you have a very short term period of three to six months, we might not do well if the markets are in the high beta momentum mode. We are not a beta house but an alpha house. As and when numbers come, our stocks will perform. We don’t believe in playing beta in the market.

The stock market is at a crucial phase. Though the market has been rallying thanks to ample liquidity, the long-term outlook continues to be bleak because of the depressed economic outlook. What should investors do in this scenario?
Though the economic outlook looks difficult, we are seeing the government taking some measures. Also, with better monsoons and once the rural economy picks up, things should be much better in the next six to 12 months. This should bring back the economy to, say, 6-6.5% level of GDP growth in the next two to three months.

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