Axis Midcap Fund: Withstanding the Market Volatility

Dec 16, 2021

Listen to Axis Midcap Fund: Withstanding the Market Volatility

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Mid-cap Funds have recorded strong performance in the last one and a half years amid a sharp rally in most mid-cap stocks. However, going forward, the volatility in equity market is expected to intensify due to expensive valuations, inflation concerns, Omicron threat, among other factors.

Consequently, only a limited set of mid-cap stocks can showcase further growth while others may decline; some may even slip into the small-cap category. This is why it is important to choose a Mid-cap fund that lays emphasis on picking quality stocks in the mid-cap segment.

Additionally, given that mid-cap stocks are trading at premium to their long term averages, it is advisable to stagger your investment in Mid-cap Funds, preferably via the SIP route. Moreover, since mid-cap stocks can be highly volatile in the short term, invest in Mid-cap Funds only if you have a high risk profile and an investment horizon of at least 5-7 years.

Axis Midcap Fund is one such Mid-cap Fund that focuses on quality high growth-oriented mid-cap stocks to reward investors with superior risk-adjusted returns. The fund's ability to withstand market volatility has enabled it to evolve as a category outperformer.

Graph 1: Growth of Rs 10,000 if invested in Axis Midcap Fund 5 years ago

Axis Midcap Fund is a growth-oriented mid-cap biased fund that focuses on investing in high quality stocks in the mid and higher mid-cap segment having potential to grow cash flows over the medium to long term. Axis Midcap Fund combines the growth potential of mid caps with the stability of large caps to reduce the risk in the portfolio. The fund management believes in staying invested in known quality names where there is earnings visibility. Notably, Axis Midcap Fund has positioned its portfolio to include stocks with relatively higher quality and liquidity profile. Its preference for quality stocks helped it to sail through the recent market crash in 2020, wherein it managed to substantially limit the downside risk. However, the fund couldn’t participate the swift recovery phase that was largely driven by momentum stocks. Over the past 5 years, Axis Midcap Fund has rewarded investors with a CAGR of around 25.3%, as against 20.5% CAGR delivered by its benchmark S&P BSE 150 Mid-Cap - TRI index, thus generating a healthy alpha of nearly 5 percentage points.

Graph 1
Data as on December 14, 2021
(Source: ACE MF)
 

Table: Axis Midcap Fund's performance vis-a-vis category peers

Scheme Name Corpus (Cr.) 1 Year 2 Year 3 Year 5 Year 7 Year Std Dev Sharpe
PGIM India Midcap Opp Fund 3,585 70.48 59.65 37.98 25.21 19.19 23.88 0.37
Quant Mid Cap Fund 222 65.88 51.28 31.58 23.66 17.28 23.71 0.30
Baroda Mid-cap Fund 87 60.83 45.45 28.66 20.84 11.93 21.28 0.31
Edelweiss Mid Cap Fund 1,742 55.46 40.85 28.05 22.01 18.22 23.56 0.29
Axis Midcap Fund 16,107 46.64 34.98 27.99 25.25 18.10 17.82 0.36
SBI Magnum Midcap Fund 6,588 58.86 42.57 27.30 17.88 16.65 24.13 0.28
Kotak Emerging Equity Fund 16,705 52.52 36.99 27.29 21.26 19.06 23.18 0.29
Nippon India Growth Fund 11,573 52.39 36.82 25.98 20.48 16.62 23.63 0.27
Mahindra Manulife Mid Cap Unnati Yojana- 821 58.08 36.64 25.94 -- -- 20.71 0.29
UTI Mid Cap Fund 6,664 49.47 39.93 25.68 18.91 15.63 22.70 0.27
S&P BSE 150 MidCap- TRI 53.39 38.96 24.97 20.45 17.82 24.66 0.25
Returns are point to point and in %, calculated using Direct Plan - Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on December 14, 2021
(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.
 

With superior performance in the last few years, Axis Midcap Fund has managed to generate a significant lead over many of its category peers, across most time periods. Even though the fund has trailed the benchmark and many of its peers in the current bull phase, it is not expected to have a lasting impact on its long term fundamentals. Notably, over the long term horizon of 5 years and 7 years, Axis Midcap Fund has managed to keep a clear lead over its benchmark and also stood among the top quartile performers in the category.

The fund's superior outperformance over the last few years has helped it to generate higher risk-adjusted returns for investors. Axis Midcap Fund has encountered much lower volatility (17.82%) when compared to its category peers and the benchmark. Moreover, its Sharpe ratio is currently among the highest in the mid-cap funds category, thus rewarding investors with superior risk-adjusted returns.

Investment strategy of Axis Midcap Fund

Being a mid-cap fund, Axis Midcap Fund has a mandate to invest minimum 65% of its assets in mid-cap stocks. It aims to select larger midcap companies, which are flexible, innovative, and have high growth potential along with quality management as well as liquidity. Axis as a fund house is biased towards playing long-term growth stories and holds stocks with a long term view.

After significant underperformance of Axis Midcap Fund in CY 2016, the fund management has been very careful in choosing stocks in the mid-cap space and the corrective measures it took to revive the performance of the scheme, finally paid off. The fund house strengthened the quality check and tightened the risk management process as well as the approval process. Moreover, the fund manager also restructured the portfolio of the fund to have a sharper focus. The results could be clearly seen in the fund's performance registered over the past 3 to 5 years.

Following a combination of the top-down and bottom-up approach of stock picking, Axis Midcap Fund invests in a fairly diversified portfolio of 50-55 stocks, limiting exposure to single stock within the 5% mark. Although Axis Midcap Fund 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 in the mid cap segment.

Graph 2: Top portfolio holdings in Axis Midcap Fund

Graph 2 Graph 2
Holding in (%) as on November 30, 2021
(Source: ACE MF)
 

Given the growing size of its corpus, Axis Midcap Fund has increased the number of stocks in its portfolio to around 60 stocks from around 35-50 stocks earlier. As on November 30, 2021, Axis Midcap Fund held a fairly diversified portfolio of 62 stocks. The top-10 stocks accounted for around 32.4% of its assets, of which 6 are large-cap names. Cholamandalam Investment & Finance Co. topped the list with an exposure of around 3.9%, followed by ICICI Bank, Coforge, Astral, Avenue Supermarts, and Mindtree having an allocation of around 3% to 4% each.

Axis Midcap Fund's holdings in Mindtree, Mphasis, Astral, Avenue Supermarts, Coforge, Cholamandalam Investment and Finance Co., Voltas, among others, have proved to be rewarding in the last one year. On the other hand, City Union Bank, Ipca Laboratories, Coromandel International, Whirlpool of India, were among stocks that turned out to be laggards in the portfolio.

In terms of sector holdings, Axis Midcap Fund's portfolio is skewed towards Infotech where it has allocated 18.2% of its assets, closely followed by Banking & Finance stocks with combined allocation of 16.8%. The fund's other core sectors include Engineering, Retail, Consumer Durables, Consumption, Pharma, Cement, Oil & Gas, and Auto Ancillaries. The top 10 sectors together accounted for around 76.4% of its assets.

Suitability

Given the considerable rise in its corpus over the last one year, Axis Midcap Fund may be nearing its capacity constrain. However, its reasonable exposure to highly liquid large and larger midcap stocks provides the fund an advantage of quick liquidation of the portfolio in case of extreme conditions.

Although Axis Midcap Fund is an aggressive growth-oriented mid-cap fund, it avoids taking momentum bets and focuses on high quality growth stocks. This helps it to ride the tough market conditions well. The nimble approach helps the fund take advantage of sectoral rotations during positive as well as negative market conditions. The current fund manager, Mr Shreyash Devalkar, has done well to turnaround the fortune of the fund, and regain its top position in the mid-cap space.

Axis Midcap Fund is suitable for aggressive investors looking for capital appreciation from quality mid-cap stocks over the long term horizon of at least 5-7 years.

 

Warm Regards,
Divya Grover
Research Analyst

 

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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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