Axis Focused 25 Fund: Winning Through High Conviction Ideas
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Since the last couple of years, the equity market has been polarized, where only a handful of stocks across market caps and/or sectors have been doing well. Focused funds aim to identify such high growth potential stocks and take concentrated exposure in them.
Beyond a point, diversification may not help in generating higher returns, which is why focused funds invest in a compact portfolio of not more than 25-30 stocks. This makes the fund manager's role important in picking high conviction stocks.
If the fund manager's conviction does not pay off as expected due to economic or any other disruption, investors may suffer losses due to the concentrated nature of the portfolio.
Axis Focused 25 Fund (AF25) is one such focused fund that focuses on companies having the capability to sail through their business cycles without being affected by short term market volatility.
Graph 1: Growth of Rs 10,000 if invested in Axis Focused 25 Fund 5 years ago
AF25 has a very impressive track record of generating superior alpha over its benchmark and many of its category peers, making it one of the top contenders in the category. The fund's emphasis on picking high conviction stocks of quality companies having high growth potential has resulted in healthy returns across market cycles in the past. Over the last 5 years, AF25 has rewarded investors with a CAGR of approximately 9.6%, as against the 5.8% CAGR delivered by its benchmark index. Thus, generating a healthy alpha of close to 4 percentage point CAGR compared to the benchmark. An investment of Rs 10,000 in the fund 5 years back would have been valued at around Rs 15,805 as against Rs 13,258 for the simultaneous investment in the market index.
Data as on July 15, 2020
(Source: ACE MF)
Table: Axis Focused 25 Fund's performance vis-à-vis category peers
Returns are point to point and in %, calculated using Direct Plan - Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on July 15, 2020
(Source: ACE MF)
*Please note, this table only represents the best performing funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme related documents carefully. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.
AF25 has delivered superior performance over the last few years and holds a strong track record of outperforming the benchmark Nifty 50 - TRI as well as its peers by a significant margin. Over the longer time horizon of 3-year to 7-year period, the fund has generated a lead of around 3-4% point CAGR over the benchmark. Even on shorter time period of 1-year return basis, the fund has managed to keep a clear lead over its benchmark and the category average.
On risk-return parameters, AF25 clearly stands out against its peers and tops the category chart with a Sharpe of 0.04.
Investment strategyof Axis Focused 25 Fund
Categorised under focused funds, AF25 is mandated to invest in a concentrated portfolio of maximum 25 companies. The scheme aims to identify high conviction ideas with focus on companies that have the capability to sail through their business cycles without being affected by short term market volatility. AF25 is large cap biased where it allocates 70-90% of its assets along with some exposure to midcaps.
The fund manages risk by diversifying the portfolio across sectors.While picking stocks the fund follows a bottom-up approach to identify best ideas and holds active high conviction allocation to some of the selected stocks. Although AF25 follows a buy-and-hold investment strategy, it is nimble in its approach and does not hesitate to churn a small portion of its portfolio to capture attractive opportunities.
Graph 2: Top portfolio holdings in Axis Focused 25 Fund
Holding in (%) as on June 30, 2020
(Source: ACE MF)
AF25 holds a compact portfolio of up to 25 stocks, limiting exposure to single stock within the 10% mark. As on June 30, 2020, the top-10 stocks accounted for 64.7% of its assets. Kotak Mahindra Bank topped the list with an allocation of 8.1%, followed by HDFC Bank, TCS, Bajaj Finance, Avenue Supermarts, and Reliance Industries.
The fund benefitted immensely from its holding in Avenue Supermarts, Reliance Industries, Info Edge (India), Asian Paints, Pidilite Industries, etc. in the last one year. Whereas, it lost value in Bajaj Finserv, Bajaj Finance, HDFC, HDFC Bank, Kotak Mahindra Bank, among others.
In terms of sector, the fund's portfolio is majorly exposed to Banking and Finance stocks with a combined allocation of about 35.7%. Infotech, Retailing, Petroleum, Engineering and Cement stood among the other top sectors in the portfolio. These sectors together accounted for close to 80% of its assets.
Suitability
AF25 has generated impressive returns over the benchmark and many of its category peers across most time frames. While doing so, the fund has resisted from engaging in undue risk and has proven his ability to limit downside. It has been nimble in its approach by taking advantage of sectoral rotations based on market conditions.
AF25 has an experienced fund manager at helm whose convictions have played out well in the past. However, do note that due to the concentrated nature of a focused fund's portfolio, investors may incur heavy losses if the fund manager's conviction in a particular stock/sector does not pay off as expected. This makes AF25 suitable for aggressive investors with a long term investment horizon of at least 5 years.
Warm Regards,
Divya Grover
Research Analyst
Editor's note: The last few years have not been among the best for equity mutual funds. While most funds have underperformed or are struggling to match the returns of the benchmark, there are few funds that have the potential to constantly generate alpha for its investors. And we have identified five such high alpha generating funds, in our latest report 'The Alpha Funds Report 2020'. Do not miss our latest research finding. Get your access to this exclusive report, right here!
Note: This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.
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