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Citrus Analysis: Distilling the best ideas: Axis Focused 25 Fund
Wed, Jun 20, 2012
Source : Sanjay Kumar Singh, Citrus Interactive

 

After a long lull, a spate of new fund offers (NFOs) has once again hit the market. Axis Mutual Fund’s Axis Focused 25 Fund is one of them. This large-cap fund will hold a concentrated portfolio of about 20-25 stocks. Ninety per cent of its portfolio will consist of companies belonging to the BSE 200 universe. Equities will comprise 65-100 per cent of the portfolio while debt and money market instruments will range from 0-35 per cent. The fund’s benchmark is S&P CNX Nifty. It will hold both growth and value stocks in its portfolio.

Fund’s rationale

The rationale behind launching a focused fund is sound. According to Pankaj Murarka, the fund manager who will look after this fund, “Too much diversification can affect a fund’s returns. Even in case of more diversified funds, returns come primarily from 30-40 per cent of stocks in the portfolio.” 

This fund will focus on a few but high-quality ideas. Says Murarka: “When times are good, a lot of companies do well. But in challenging times only a few do well. If we create a portfolio of stocks with superior business dynamics and high return on equity (RoE) that will lead to substantial wealth creation for investors over time.”

The fund house’s research demonstrates a link between high RoE and stocks returns: between December 2003 and December 2011, the top 10 per cent of BSE 100 companies, which boasted of an average RoE of 37 per cent, gave a compounded annual return of 30.3 per cent. Between 2008 and 2011, the 34 companies within the BSE 100 index that had RoEs greater than 20 per cent gave an average annual return of 23 per cent, while the BSE 100 index was up only 16 per cent. Even in CY2011, when the BSE 100 index fell -25.7 per cent, the top 10 per cent stocks belonging to BSE 100 gave a return of 13.6 per cent. It is such quality stocks that this fund will focus on.     

As for tackling the volatility that is inevitable in a concentrated portfolio, Murarka says: “We have put risk mitigation tools in place. For instance, at all times the fund will invest in at least four sectors, and no single sector will account for more than 30 per cent of the portfolio.”

On volatility, he further adds: “We have data which shows that while a concentrated portfolio has higher volatility in the short term (three to six months), over a longer period (three to five years or more), the volatility of a concentrated portfolio holding superior businesses is not very different from that of the BSE 100 index.”

Pune-based financial planner Veer Sardesai too endorses the idea of a focused portfolio. “With a concentrated portfolio the fund manager tends to focus a lot more on the stocks that he puts into the portfolio. Any mistake in stock selection gets reflected in the fund's performance a lot more in such a fund,” he says.

A focused portfolio is also more manageable. Says Sardesai: “Since the fund manager has only 20-25 stocks in his portfolio, he can keep closer watch over them. On the other hand, as Warren Buffett also says, if you have 70-80 stocks in your portfolio, you can't keep a close watch on all of them.”

Furthermore, according to Sardesai, 25 stocks are enough to give you adequate diversification.

His only caveat is that such a focused fund should invest mostly in the more liquid large-cap stocks. “If the fund manager gets into mid- or small-cap illiquid stocks, it can create problems for such a concentrated fund. When markets fall and investors try to redeem, the fund manager may have to sell at whatever price he can. The remaining unit holders in the fund will then suffer.” Another point he makes is that the fund can be held as a core holding in an investor’s portfolio only if it is predominantly large-cap with only small mid-cap holdings. If it strays too much into the mid-cap space, then it can at best be a satellite holding.

While conceding that a focused strategy has a higher probability of generating alpha than a more diversified fund, Prasunjit Mukherjee, a Kolkata-based mutual fund analyst also points out the risks. "Like all focused funds, this fund too will carry concentration risk. A series of good picks may result in good returns, but a string of poor picks would place the fund manager on a knife's edge. The risk-reward ratio is skewed on the higher side," he says.

Fund house’s track record

Sound but limited track record

 

 

 

 

 

Scheme Name

Nature of fund

Date of inception

1 Year

YTD

Since inception

Axis Equity Fund(G)

Large and mid-cap

Dec-09

-4.01

9.71

0.24

S&P CNX Nifty

 

 

-5.63

9.51

 

Axis Midcap(G)

Mid and small-cap

Feb-11

-1.94

14.00

0.75

BSE MIDCAP

 

 

-13.49

14.81

 

Axis LT Equity(G)

ELSS, large-cap

Dec-09

-0.75

10.41

8.51

BSE-200

 

 

-8.14

10.47

 

As on  - 19-Jun-2012

 

 

 

 

 



Axis Mutual Fund is a young fund house that started operation in January 2009. It has average assets under management of Rs. 8,874.56 crore (March 2012 figure), which places it in the ranks of mid-sized fund houses.

The fund house has three equity funds currently (the NFO is its fourth fund). Two were launched in December 2009 and one in February 2011. For the limited period that these funds have been around, their performance has been good (see table: Sound but limited track record). Alas, we believe they have not been around long enough: two-and-a-half years is too short a time horizon for judging a fund's performance (even rating agencies begin rating a fund only after they have completed three years).

Are alternatives available?

Sound alternatives available

Scheme name

Consolidated return (%)

Morningstar ratings

Style sheet 

Equity count

Quantum LT Equity(G)

10.26

5

L-B

24

HDFC Growth(G)

7.76

4

L-B

21

HDFC Capital Builder(G)

7.38

4

L-B

22

ICICI Pru Top 100(G)

7.10

4

L-B

23

Reliance NRI Equity(G)

5.14

4

L-B

25

JPMorgan India Equity(G)

4.35

4

L-G

15

Above list contains funds that hold 25 stocks or less, have a five-year track record, and a good rating 

L-B: large blend; L-G: large growth; S-B: small blend

Consolidated return calculated giving 50% weight to 5-yr return; 30% to 3-yr return and 20% to 1-yr return 

Database: Ace MF 


The idea of a focused fund is certainly not new. Currently 27 diversified equity funds have stock holdings of 25 or less. Twelve have a track record of five years (see table: Sound alternatives available). One is a five-star fund (Quantum Long-Term Equity) while five (belonging to HDFC, ICICI, Reliance and JP Morgan) enjoy a four-star rating from Morningstar. So alternatives with similar mandates and sound track records do already exist.

The NFO for Axis Focused 25 Fund closes on June 25, 2012. 

Take into account all the pros and cons discussed above before making an investment decision. 



You may contact the author on sanjay.singh@citrusadvisors.com

 
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