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Interview of Chandresh Nigam, Head - Investments, Axis AMC
Fri, Feb 22, 2013
Source : Shoaib Zaman, Citrus Interactive

Chandresh Nigam, Head – Investments explains the processes at Axis Mutual Fund, and shares his views on the market in 2013.

Nigam is a mechanical engineer from IIT Delhi and PGDM from IIM Calcutta.  He has over 20 years’ experience in equity fund management.  His previous experience includes stint with TCG Advisory, ICICI Prudential AMC & Zurich India AMC. Given below is excerpt of the interview he had given to Team Citrus Interactive.

1. How would you define your investment strategy and philosophy?

We believe equity has to be a serious and meaningful role in wealth creation for investors. Equities provide a lot of opportunity, it is probably one of the very few avenues where you can maintain and grow the purchasing power of your money, but along with that comes risk. So how do you participate in this market so that you make good risk-adjusted returns! Ultimately this is what we help our investors to do.

The investment philosophy at Axis Mutual Fund is to be an active manager providing competitive investment performance using fundamental based investment strategy and a disciplined, research driven investment process with holistic risk management.

Basically we are a bottom up and business focused fund house where investment decisions are not taken on tactical or market considerations, but led by fundamental research of the business. Our investments are largely focused on companies that have the ability to generate long term sustainable growth.

2. What is the process of monitoring the different types of risks?

We look at a number of risks affecting any stock – quality, price, liquidity, volatility and event-related risks.

The risk management processes is an integral part of the investment process. Our investment process has been designed such that each of these risks are addressed during the different steps of the process.

Further every analyst and fund manager is looking at 'what is the attendant risk with any position in the portfolio or the stock?’ that he is researching. We believe that our risk management strategy is sophisticated and highly effective, since it is the analyst and the fund manager who is taking care of the risk management.

3. How do you pick stocks?

Within our process we want to ensure that we are always invested in the right kind of businesses.

In the market there are times when all the companies are doing well. We know that businesses are about business cycle and volatility. And sometimes when times are tough, then the companies may not survive if they do not have sustainable business model, competitive strength, strong balance sheet or great organizational strength in terms of promoter/management capability. We don't want to be in any of these companies.

The starting point of our investment process is to shortlist listed stocks into what we call the investment universe. All investments can only be made into stocks that are a part of the investment universe. Universe short listing happens using a number of parameters including sustainable earnings growth potential, management credibility and liquidity of the stock.

Then this universe is split up among the analysts sector wise for detailed research. The outcome of the research process is to assign a ‘fair value’ to each stock that is included in the universe. The analysts also generate a model portfolio for each of their sectors based on the stock ideas that have the best potential.

This is the background research work available to the fund managers while constructing their portfolio. Fund managers look at a number of things, including risk-return objective of their strategy, investment restrictions, to make allocations to different stocks.  

3. How many equity research analysts do you have in your team?

The entire equities team has research responsibilities including the fund managers. We believe that the experience of all the fund managers allows them to carry out high quality research into their respective sectors. There are 5 people in the equities team out of which 4 also have fund management roles while one is a dedicated analyst.

4. Who should choose what from your three equity funds: Axis Mid-cap, Axis Equity and Axis Focused 25?

At Axis Mutual Fund we want to offer sharply positioned products that participate in different sections of the market. We believe that this allows distributors as well as investors to understand the objectives and risk profiles of each strategy and select the one that works best for their specific portfolio objectives.

Axis Equity fund. It is a Diversified large cap biased portfolio that is positioned as a core allocation for any equity investor. It is the only fund in the industry which has risk target apart from the performance objectives. The large cap allocation is between 70-100% while the fund has a limited ability to allocate to mid-caps upto 30% of the portfolio.

Axis Focused 25: It is targeted at investors willing to invest with a slightly higher amount of risk and willing to look beyond short term market movements. The fund is constructed such that it makes concentrated allocations to high conviction ideas that can generate wealth over the medium to long term. The fund is extremely focused on buying quality businesses that can deliver sustainable growth. The fund’s allocations are primarily in the largest 200 stocks by market cap.

Axis Mid-Cap: The portfolio invests in mid cap space in a differentiated manner. The focus is on allocating to larger mid-cap space where the risk and return profile is much more favourable as compared to smaller mid caps. The focus is on emerging sectors/ businesses that have the potential to deliver high growth. Given the investment universe, the risk profile of the fund is higher than AEF and AF25F.

5. Sebi has been trying to improve corporate governance, and is asking MFs to actively participate in AGMs. What is your view on this measure? How do you guard against those companies that have a governance issue?

Due to our processes the companies where we invest are of high quality, therefore we tend to get less of issues related to corporate governance. However, there could still be instances where we may have a view that the company does not share. We inform our custodians on when to vote against a motion.

6. Where do you see the markets going from here in 2013?

We have never been fan of any index number. We believe that it’s the individual companies that make the market than otherwise. So the market is at 6000 because of where the individual companies are, and the market will trade higher or lower because of depending on how these companies perform.

From that perspective, if someone looks at the index, then even after five years essentially the index is still at the same level. Sensex touched its high in 2008, then it again touched the high in 2010, and we are again at similar levels. But in this period the composition of the index has changed quite dramatically.

Approximately 15-20 per cent of the companies are at an all-time high, and maybe five times the price at which they have been five years ago. Then some 70-80 per cent of the companies are still where they were few years ago. This is very good for investors like us who are completely bottom up and business focused. We think there are great number of businesses which will do well.

So from an investors’ perspective, whether the index is at 6000 or 20000 i.e. which ever index you are looking at, we think there is always an opportunity in the market in the medium term. By medium term we mean 3-5 years of time horizon.

We have also realised that though there are businesses which will chart out their independent journey, but a large number of business are overall dependent on the economy, not just locally but also globally.

Therefore while top line GDP growth rate has not been strong, overall corporate profitability has been affected. And since we believe that long term stock prices track corporate profit, this has driven the weak stock market performance of the last five years.

If the economy as a whole improves supported by some stability from the global economy then the market can go much higher from current level over the medium terms.

7. What would be the major issues that will affect the Indian equity markets in 2013?

It will be implementation of policies by the government. The confidence of global and local investors whether the fiscal deficit plan is going to be on track and the financial stability is going to remain intact.

Second half of the year, we are all going to focus on elections and whichever party comes to power, if there is a perception that there is general stability then I think everything will be fine. If not then that will have effect on the market.

8. Which are the sectors that you are bullish about this year?

We don’t think in terms of sectors, we are completely bottom-up, business focused fund house. While there are some sectors which are completely unpredictable in terms of business volatility like global commodity etc., which we generally don't like from a long term perspective but on a short term tactical perspective, depending upon valuation etc. we do sometimes invest in them on a tactical basis.

There are opportunities in every sector. From a long term perspective we look at which businesses are showing secular growth and which ones are cyclical growth businesses.

I think from cyclical growth perspective even sectors like capital goods, infrastructure select opportunities exist. 

I think we would be a little bit slow on global commodities and real estate. Besides that we think there are opportunities everywhere, be it financials, technology, pharmaceuticals, consumer, energy, media, automobile etc.

9. Your mid-cap fund is among the best performing within the category and even across the equity space. This you have managed to achieve with a less churning of the portfolio. Is it by design? Will this continue going forward?

As I have said, we are not buying stocks, we are buying businesses. A large part of our portfolios will remain same. Being a great timer in the market is difficult and our approach is different. We invest based on our strengths, which are essentially business identification, business analysis, see where the businesses are going over a longer term. The idea is to buy high quality businesses.

We don't have anything against churning, if it adds value to the portfolio. Suddenly if some stock does very well we are not averse to booking profit. The idea still is that in all points in time, I should have my best ideas in the portfolio. It doesn’t mean that every 15 days when I do a review, I sell off half my portfolio and bring in new set of stocks; market doesn't exhibit that kind of volatility. And sometimes there are high impact costs, especially in the mid-cap space.

Generally, over a period of time the fund manager has to remain alive to the fact while he may have invested in a stock six months or one year back, is it still remaining one of his top ideas. If it remains a good idea, then it stays; if something else has come up and the stock in your portfolio has already performed then it might be better to get out of the stock. Also sometimes you may have made a mistake and you will have to get out of the stock.

One of the psychological things that we have seen or problems that fund managers' face is that sometimes you get into a stock and it does well, if it does well then there is a tendency to take profit quickly. And if it doesn’t do well then there is a mental hangover, which means you do not want to admit to your mistakes and you say ‘no-no this stock will come up, it is just a short period of time’.

We try and work differently. We encourage all our portfolio managers to tell us what would be the ideal portfolio as of today considering the fund. That gives me a map of my best ideas as of today. Then you go and compare with what you are holding. Most of the time things remain the same, if there is a laggard or couple of things not doing well, it will force more debate and thought process to say 'maybe this does not make sense from here on'.

We want to be very objective with that, I think psychology affecting with decision making is not a good thing. So with this process, and risk management measure, we try and reduce the psychological issues and hang-ups that fund managers can be affected with.
 
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