An Actively Managed Fund With A Concentrated Strategy
In January 2013, when Axis Long Term Equity Fund found its place in our list of recommended funds, it was an INR 426 crore fund (December-end 2012), competing in a category dominated by the industry giants at the time. Jinesh Gopani a low profile fund manager then, was managing only one fund for the Fund House. 4.5 years later, the fund is the largest tax saving fund in the industry with a corpus of INR 15,223 crore as on October end 2017. While Gopani continues to keep a low profile as the fund manager he is now the Head of Equities for the fund house. He is a whizkid who has an eye for detail when it comes to picking the right stocks in his portfolio and stands by his conviction even if the market decides to change. We were curious when Gopani was handed over the reins of Axis Focused 25 Fund, the smallest equity fund from the fund house in June 2016 after it was changed hands twice.
The 'Focused Fund' theme has now become a new category in itself with SEBI's new diktat relating to 'Categorization and Rationalization of Mutual Fund Schemes'. The Regulator has defined a fund in this category as an open-ended scheme with a mandate to invest into a maximum of 30 stocks. The fund house also has to define where the fund should be placed along the broad market capitalization spectrum - large cap, multi cap, mid cap or small cap fund.
After 19 months under Gopani's stewardship, we elaborate our analysis of the strategy and the portfolio to understand if he is yet again trying to recreate the magic he did with the Axis Long Term Equity Fund. In which case, we would like the first mover advantage like we did earlier and recommend this fund to our investors. We also have Gopani's view of his strategy.
As per the Scheme Information Document (SID), the fund invests into 25 companies from among the top 200 in terms of market capitalization, thereby creating a concentrated portfolio. The SID states, "In order to have a concentrated portfolio, the scheme will follow a bottom up stock selection approach. The scheme will reflect our best investment ideas at all points of time".
In our interview with Gopani, he explains the investment philosophy that he follows.
What is your mantra for success?
"I do not go across all companies and sectors but trust my conviction to bet on the right stocks which in turn creates alpha in my portfolios".
Do you follow a different strategy for managing Axis Focused 25 Fund?
"No, I believe in just idea generation and that is not unique to any particular fund. We are bottom-up stock pickers of companies with sound business models, pricing power, quality management which have consistently created long term wealth for shareholders. For us,
Quality = Credible management + Ability to grow profits and cash flows on a sustainable basis + Clean balance sheet"
Are you worried about some of the expensive bets in the portfolio?
"We have to pay a premium for the good companies which we include in our portfolios. Quality always comes at a premium and when we say expensive, it has to be in relative terms. Our aim is to create wealth for our investors in the long term and hence the time horizon for holding our high conviction bets is definitely more than 12 months. This I feel should justify the existence of expensive picks in our portfolios. A corollary to this is that as consumers, we are always ready to pay a price premium for the brands that we have faith in and we do not have any regrets about it".
Current Portfolio Strategy
Since the inception of this fund in July 2012, the average allocation into large caps, mid caps, small caps and micro caps have been to the tune of 75%, 16%, 3% and 1% respectively. There were times when the exposure into small cap and micro cap stocks were as high as 9% and 7% respectively. However, since Gopani took over the fund, the allocation into small and micro caps have become virtually nil.
We view this as a conscious attempt by the Fund Management team to replace the multi cap tag associated with the fund and convert it into a pure large cap fund wherein 80% of the portfolio is strictly into large cap themes.
The fund underwent complete restructuring after Gopani took over the reins in June 2016. Here are some interesting observations on the portfolio since its creation:
Tata Consultancy Services (TCS) entered the portfolio in July 2012 (Inception) and was held continuously for 52 months. However, the global IT leader was removed from the portfolio in November 2016.
Infosys, one of the top holdings in July 2012 was moved out of the portfolio in May 2014, brought back in August 2015 and stayed till June 2016. In February 2017, the stock was again chosen for a month.
State Bank of India (SBI) was also a part of the portfolio from July 2012 till August 2013. Having a penchant for Private Sector Banks, it was surprising to see Gopani include this stock in his portfolio for a month in March 2017.
Sun Pharma, one of the top holdings of this fund from August 2015 to November 2016 was moved out from the portfolio in December 2016. It is noteworthy that in July 2017, Sun Pharma Advanced Research Company, the generic research arm of Sun Pharma entered the portfolio. This shows that the Fund Manager continues to trust the parent company and its subsidiaries.
Gopani seems to be averse to stocks from the entertainment space. Dish TV India and Zee Entertainment Enterprises which were picked by his predecessor disappeared in July 2016 and December 2016 respectively. However, PVR, one of the big names in this space was in the portfolio for two months (April and May 2017).
Since October 2016, finance, banks and auto ancillaries have been among the three top sectoral picks of the fund with an average allocation of 16.39%, 17.01% and 11.37% respectively.
Automobile is another favourite sectoral pick and from September 2016 onwards, Gopani has been bullish on just 1 company from this sector, specifically Maruti Suzuki India. The stock which was a part of the portfolio since inception had made its way out in October 2013. Gopani's entry into the fund bought back the stock in the portfolio in July 2016. As on October-end 2017, India's most popular car company is one of the top holdings of this fund.
Gopani also ensures that he is not missing the IPO mania. However, it seems like the huge listing gains are achieving the price targets in a short time and the fund is laughing its way to the bank.
Exposure of IPOs in the Portfolio (June 2016 to October 2017)
Fresh exposures taken by Gopani since June 2016 which continues to be a part of the portfolio as on October-end 2017.
This list indicates that Gopani does not just choose good quality large caps but also includes the emerging stars in the mid cap space like Supreme Industries, V-Guard Industries, Info Edge (India), WABCO India and Sun Pharma Advanced Research Company Ltd., in the portfolio.
It is worth noting the similarity of this portfolio vis-a-vis Axis Long Term Equity Fund, the largest tax saver fund in the industry solely managed by Gopani for the last six years. As on October end 2017, there are 19 stocks in Axis Focused 25 Fund which are present in Axis Long Term Equity Fund as well.
The unique stocks in Axis Focused 25 Fund vis-à-vis Axis Long Term Equity Fund (October-End 2017) are as follows:
If one had invested INR 10,000 into the fund, Nifty 50 (Benchmark) and S&P BSE 200 (Additional Benchmark) on November 1, 2012, then the surplus as on October 31, 2017 is INR 23,115, INR 18,309 and INR 19,841 respectively.
A multi cap fund which was restructured to be in sync with the "Resurgent India" theme is our focus for this month. The USP of this fund is the focused strategy where the fund manager, one of the finest minds in the Fund Management space is given the flexibility to pick the best stocks in the large and mid cap space. In our Recommended Funds 2015 note, we stated, "Jinesh Gopani, who has an eye for detail when it comes to picking stocks, has proved that Axis Long Term Equity Fund is the first recall when investors think of tax saving funds".
Though there is a large overlap of stocks with Axis Long Term Equity Fund, the mandate is definitely not to create a twin portfolio. Gopani will play out his high conviction bets in this fund with higher exposure unlike in Axis Long Term Equity Fund which cannot increase the exposure limit due to its size and unrestricted number of stocks upto a stipulated level. Also, unlike Axis Long Term Equity Fund, this fund follows a concentrated strategy and is actively managed. Therefore, it is recommended only to our moderately aggressive and aggressive investors with a time horizon of five years.
We urge our investors to not be concerned about the expensive nature of some of the bets and the right time to enter into them. As Gopani said, we also strongly believe that quality comes at a price and these stock picks will continue to create long-term wealth for our investors.
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