Axis Long Term Equity Fund – Still a dependable bet?
Axis Long Term Equity Fund as a tax saving fund is quite popular ‘Equity-Linked Savings Scheme (ELSS)’ among investors to fulfill dual purpose of tax savings (under Section 80C) and wealth creation over the long term. The scheme is apt for investors seeking capital appreciation and generating income over the long term by investing in a diversified portfolio of equity and equity-related instruments.
However, the fund’s recent underperformance has investors in jeopardy as regards what future holds for the fund and if they should switch to alternate investment options. Through this write-up, we will try to provide our insights on the fund as well as its future outlook.
In case you have not heard about the scheme, here are few details which may interest you:
Axis Long Term Equity Fund is an open-ended ‘Equity-Linked Savings Scheme’ with a 3-year lock-in and provides tax benefit under section 80C of the Income Tax Act, 1961. The fund is based on bottom-up stock picking approach (i.e. fund focusses on high-quality stocks rather than pre-defined allocation to specific sectors) and invests in good quality businesses with solid fundamentals for the long term to create wealth for investors. 3- year lock-in only helps to achieve such a purpose as the fund manager can take relatively longer bets while ignoring short-term volatility in the market.
The fund invests across market cap with large-caps around 50%-100% and mid-caps up to 50%. The fund looks to focus on a consistent and long-term portfolio with limited downside potential. The focus is on high growth, high quality, and fundamentally strong businesses with excellent balance sheets while ignoring high cyclical and regulated sectors, ones with serious corporate governance issues or political interventions. The fund’s focus on investing in quality businesses is impeccable. Bottom-up approach only helps to enhance investor’s returns over the long term. Themes which fund bets on are related to Consumer discretionary /FMCG, Housing, Banks/NBFC’s, Auto/Auto ancillaries and emerging themes such as E-commerce, Logistics, Staffing solutions.
In comparison to Feb 16, the fund has decreased allocation to TCS, Sun Pharmaceuticals, Bata India, Divi’s laboratories, Coffee day enterprises while increasing allocation to Tech Mahindra Ltd, Cholamandalam Investment and Finance Company Ltd, Bosch Limited, Maruti Suzuki, Infosys.
Recently fund has invested in Avenue Supermarts which signifies active fund management by the fund manager and invest in companies which will be wealth creators in the long run managed by exemplary management.
As on April 2017, sectoral allocation in percentage terms is as below:
Finance – 18.78. Banks – 16.17, Auto Ancillaries – 12.60, Auto – 7.10, Construction Project – 5.42, Consumer Durables – 5.37, Industrial Products – 5.05, Pharmaceuticals – 4.82, Chemicals – 4.23, Others – 16.18
Financial sector includes quality businesses, namely HDFC Limited, Bajaj Finance Limited, Gruh Finance Limited to name a few while banking sector includes likes of Kotak Mahindra Bank and HDFC Bank Limited. Motherson Sumi, BOSCH, WABCO completes the list of auto ancillaries while Maruti Suzuki and Eicher are excellent additions from the auto sector. L & T in Construction project space while Symphony and TTK Prestige in consumer durables are notable holdings. Pharmaceuticals sector allocation is now down to 4.63% with Sun Pharma and Cadila and IPCA in the list. Pidilite in chemicals space is worth mentioning with 4.23% of assets allocated. Cummins India is also a notable holding in the portfolio with 3.01% allocation.
Investors should not invest solely looking at the portfolio alone as holdings can change anytime depending on fund manager’s investment strategy. Current sector allocation and portfolio composition clearly underline fund manager commitment to invest in growing as well as stable well managed businesses. There is not a single name in the portfolio which can raise eyebrows from a fundamental aspect. There can be underperformance in the short term as stocks in the portfolio may have run ahead of earnings and consolidate for some time but over the long term, good businesses will eventually give good sustainable growth with relatively less risk.
Portfolio holdings in mid-cap space host some solid, quality businesses with no problem whatsoever with business fundamentals and also growing at steady pace. Likes of Gruh Finance, Pidilite, Symphony, TTK Prestige, Nestle to name a few are secular growth stories and have bumped up fund returns since the last few years. Fund manager’s great ability in cherry picking quality mid-caps with growing large caps makes up a solid combination.
Fund philosophy revolves around ‘Buy and hold’ high growth scalable businesses run by strong minded managers/promoters that can generate higher RoEs (Return on Equity), cash flows and in turn higher dividends to the shareholders over the longer run
Scalability of the business model as well as sector outlook for 3 – 5 years is an important indicator defining the portfolio selection.
Corporate governance, track record, performance has to be impeccable.
Investing in high quality, high growth fundamentally strong businesses while avoiding cyclical and highly regulated sectors sums up the fund investment methodology.
Key Facts about the fund:
Fund Type – An Open-ended equity-linked savings Scheme with a 3-year lock-in
Investment Plan – Growth/ Dividend
Allotment date – 29 December 2009
Benchmark – S&P BSE 200
Entry Load – Nil
Exit Load – Nil (Since Inception)
Minimum Investment – Rs.500 & in multiples of Rs.500 thereafter
Additional purchase – Rs.500 & in multiples of Rs.500 thereafter
Sleep in Peace (SIP) – Monthly – Rs.500 & in multiples of Re.1 thereafter Yearly – Rs. 6,000 & in multiples of Rs.500 thereafter.
About the fund manager:
Mr. Jinesh Gopani is managing the fund since 01 Apr 2011 and has done exceedingly well managing the fund. He is Head, Equities – Axis AMC and has 14 years of work experience. He has been an important force behind excellent performance of the fund. His hallmark investment philosophy is not to compromise on quality, even though it may translate to short-term underperformance.
Risk Parameters (3 years):
A beta of less than 1.0 indicates that the investment will be less volatile than the market, and, correspondingly, a beta of more than 1.0 indicates that the investment‘s price will be more volatile than the market. Fund’s beta of .86 indicates superior risk-reward ratio.
Standard Deviation (%) – 13.72
Sharpe Ratio – 1.31
Beta – 0.90
If you would have invested 5000 per month via SIP in Axis Long Term Equity fund – Regular Plan (Growth) between May 01, 2010 to May 01, 2017 – fund would have returned a CAGR of 20.26% with the investment amount of 4,25,000 translating into net value of 869,643.21 as on May 1, 2017 which is excellent by any parameters.
Axis Long Term Equity primarily invests in good businesses which command high PE multiples. It implies fund manager is completely fine with paying a premium price in order to buy quality businesses. Due to such characteristic of the fund, there can be instances wherein fund under-performs for a particular duration so that earnings catch up with the stock price of these high PE companies or due to slowness in respective businesses which stagnates stock price. So as an investor, we should understand such characteristic of the fund and stay put during such bouts of underperformance.
The fund has consistently outperformed its benchmark and the category across different time frames. Though fund’s last year under-performance as compared to its peers has played a dampener over its excellent performance since inception, it still is an excellent choice in the category. 18.88% CAGR (as on 28th April 2017) since inception is no mean feat. The fund strategy of holding on to quality businesses over the long term and ignoring short-term noises has done world of good to the fund.
Holding financial stocks in 2010 to increasing allocation to FMCG and Pharma speaks volumes about fund manager capabilities. Post that for next couple of years focus was clearly on FMCG, auto ancillary, and private banks. Fund manager thus has played a pivotal role in the excellent performance of the fund.
Fund has always kept blue chips as a solid base of the fund complemented exceedingly well by quality mid-cap holdings which are very well managed businesses. Significant allocation to blue-chip stocks has helped cap downside during the market downturn.
Some of the significant positives of the fund are:
- Fund manager’s excellent stock picking capabilities and always open to new long-term growth stories and ability to correct wrong investment calls.
- Fund follows ‘buy and hold strategy’ in secular growth stories.
- Fund shies away from taking undue risk to the comfort of investors.
- Fund follows ‘bottom-up’ approach which makes sense in stock picker’s market.
- Investment in always backed by strong investment philosophy of investing quality businesses – either a large cap or a mid-cap holding with an eye to deliver superior returns.
- Fund manager allocates significant portfolio percentage to quality blue chips which are not only stable during the market downturn but can also show considerable growth.
- Fund never compromises on quality and doesn’t chase momentum which is the hallmark of an excellent fund over the long term.
- The fund is ready to take short-term underperformance for the long term gains.
- There is less churn in the portfolio as fund manager looks to ‘buy and hold’ quality businesses for the long term.
- Fund avoids cyclical stocks and highly regulated sectors.
- Any of stock holding in the portfolio has to pass parameters such as excellent management, pricing power, generate free cash flows, clean books and visibility of long-term growth outlook.
- The fund invests across the market capitalization spectrum which gives it more flexibility.
No of stocks held for at least 3 years: 22. Current weight in these stocks: 67% as on Feb 17.
- Top 10 stocks in the portfolio as on Feb 17 constitute 51% of the portfolio as against 49% a year back.
Things to watch out for:
- Fund AUM has grown dramatically over the years. How the fund manager tackles the allocation needs to be seen – will he still keep a concentrated portfolio or the number of stocks in the portfolio will increase?
- Will the fund be able to generate impressive returns as it has in the past with large AUM?
- The fund should not take undue risks in lieu of high returns.
Barring one-year return, the fund has performed exceedingly well. Fund’s fundamentals have not changed even a single bit which is heartening and investors should digest this short-term performance for long term gains with low volatility. The current value of investment if Rs 10000/- was invested on inception date – 35,557/- as on 28th April 2017.
Performance Stats as on 28th April 2017
|1 Year CAGR (%)||3 Years CAGR (%)||5 Years CAGR (%)||Since inception(%)|
|Axis Long Term Equity – Growth||19.60%||22.65%||22.69%||18.88%|
|S & P BSE 200 (Benchmark)||22.99%||14.97%||13.83%||8.97%|
|Nifty 50 (Additional Benchmark)||18.58%||11.60%||12.14%||8.29%|
Note: Past performance may or may not be sustained in future.
How has SIP in the fund fared?
Fund’s SIP performance has been equally heartening and investors should ignore short-term underperformance. Investing in the fund through SIP should be the mantra.
|SIP Investments||Since Inception SIP||5 year SIP||3 year SIP||1 Year SIP|
|Total amount invested||840,000||600,000||360,000||120,000|
|Market value as on December 30th 2016||15,53,132||9,34,191||4,06,825||1,17,184|
|Benchmark Returns (Annualised)%||8.50%||12.15%||4.83%||2.78%|
|Additional Benchmark Returns (Annualised)%||7.37%||10.30%||2.79%||1.61%|
Note: Past performance may or may not be sustained in future.
Fund has lagged its peers over a one year period considerably but has been steady over 3 and a 5-year term.
|3 month (%)||6 month (%)||1 year (%)||3 year (%)||5 year (%)|
|Axis Long Term Equity Fund (G)||11.1||14.9||21.0||22.4||24.5|
|Reliance Tax Saver (G)||8.3||15.6||31.1||24.3||22.9|
|HDFC Tax Saver (G)||9.2||17.2||38.0||18.8||18.9|
Fund’s star rating has taken a beating due to recent underperformance but sometimes running after star ratings alone can be misleading and can make you switch funds almost every year. No doubt fund has underperformed on 1-year matrix but this is too small a time to judge an established fund such as Axis Long-term Equity Fund which has delivered excellent returns in 3 and 5 year period. Such a under-performance can also be attributed to the fact that large caps have been lagging small and mid caps in this bull run by a wide margin. Some of other funds in the same category have out-performed this fund over a one year period owing to larger allocation to mid and small cap space. Besides this, fund’s exposure to pharmaceuticals also has dragged the performance of the fund. However, despite these short-term drawbacks, the fund is not just another ELSS fund but can be held in one’s core mutual fund portfolio to realize long-term goals. Fund’s excellent bottom-up strategy to pick excellent businesses hasn’t changed which induces confidence in the fund future. Though fund holdings have increased from 36 to 40 between Feb 16 to Feb 17, still the fund has a concentrated portfolio of quality businesses which should hold it in good stead for the long term. Fund manager’s quality picks in large and mid-cap space should do a world of good to investors in the long run. Quality picks in the portfolio also gives comfort to investors who are looking for an element of safety in the fund besides appreciation. This fund fits the bill perfectly.
Fund’s excellent bottom-up strategy to pick excellent businesses hasn’t changed which induces confidence in the fund future. Though fund holdings have increased from 36 to 40 between Feb 16 to Feb 17, still the fund has a concentrated portfolio of quality businesses which should hold it in good stead for the long term. Fund manager’s quality picks in large and mid-cap space should do a world of good to investors in the long run. Quality picks in the portfolio also gives comfort to investors who are looking for an element of safety in the fund besides appreciation. This fund fits the bill perfectly. The fund doesn’t change momentum and thus may lag some of the peers in the short term which may churn frequently or invest in some riskier propositions.
However, despite these short-term drawbacks, the fund is not just another ELSS fund but can be held in one’s core mutual fund portfolio to realize long-term goals. Fund’s excellent bottom-up strategy to pick excellent businesses hasn’t changed which induces confidence in the fund future. Though fund holdings have increased from 36 to 40 between Feb 16 to Feb 17, still the fund has a concentrated portfolio of quality businesses which should hold it in good stead for the long term. Fund manager’s quality picks in large and mid-cap space should do a world of good to investors in the long run. Quality picks in the portfolio also gives comfort to investors who are looking for an element of safety in the fund besides appreciation. This fund fits the bill perfectly.
Investors should not be disheartened by the short-term underperformance of the fund against its peers but should stick to this quality fund for the long term. Stopping SIP in the fund at this juncture or redeeming units (not under lock-in) midway can be a lost opportunity for investors in the long run. Probably this is a test of investor’s patience to stick to quality in spite of short-term underperformance. Investor’s who are still skeptical of its performance can keep it on their watch list and watch performance over the next one year or so before making exit or not exit decision. It makes sense to give fund more time to perform and keep investing via SIP at present juncture.
Disclaimer: The writer has investments in Axis Long Term Equity Fund – Direct Growth and opinion may be biased. Please consult your financial advisor before taking any investment decision. The write-up is for information purpose only and is not an advice of any sort.