Axis Smallcap Fund: Tapping Growth Potential in Turbulent Times

Aug 20, 2020

Though small cap stocks generally tend to be highly volatile, the small cap category has been under immense pressure over the last two years. This poor performance can be attributed to expensive valuations in the segment until a couple of years ago, prolonged economic slowdown, and demonetization. Post the pandemic outbreak, the category lost more ground, delivering devastating returns.

However, if chosen carefully, they can outpace its large-sized peers. With economy limping back to normalcy and the government & RBI announcing measures to support growth, the segment could be on track to make a comeback. This coupled with attractive valuations is making investors bullish on the growth potential.

Axis Smallcap Fund (ASCF) is one such smallcap fund that lays high emphasis on picking quality stocks and has clearly stood out in terms of performance in the recent small cap crash.

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

The fund's performance until 2 years ago was nothing to write home about. However, it clearly stood out in the recent small cap crash and has turned out to be the top category performer. ASCF has almost established itself in the small-cap space and is gradually garnering the attention of investors. Its focus on high quality growth stocks and superior stock picking ability of the fund management has driven the performance of the fund, which has rather helped it avoid downside during the recent crash witnessed in the lower market cap segment. Over the last 5-year period, ASCF has generated returns at 10.4% CAGR, thereby clearly outperforming the benchmark Nifty Smallcap 100 - TRI which generated negative returns of 0.6% CAGR.

Graph 1
Data as on August 19, 2020
(Source: ACE MF)
 

Table: Axis Smallcap Fund's performance vis-à-vis category peers

Scheme Name Corpus (Cr.) 1 Year (%) 2 Year (%) 3 Year (%) 5 Year (%) 7 Year (%) Std Dev Sharpe
Axis Small Cap Fund  2,472 13.07 8.63 9.46 10.38 NA 21.76 0.056
SBI Small Cap Fund  4,270 18.81 2.53 8.47 12.77 27.23 25.08 0.046
Kotak Small Cap Fund  1,494 17.38 1.38 2.83 7.61 20.45 25.79 -0.016
Nippon India Small Cap Fund  8,322 14.16 -3.13 2.79 9.61 25.65 27.26 -0.013
Union Small Cap Fund  328 23.87 -0.19 1.99 4.06 NA 25.17 -0.037
HDFC Small Cap Fund  7,851 -1.17 -7.80 1.47 7.45 16.16 25.53 -0.030
DSP Small Cap Fund  4,650 17.14 -0.96 -0.02 6.19 23.30 26.81 -0.051
ICICI Pru Smallcap Fund  1,199 6.41 -0.86 -0.58 4.36 12.52 27.26 -0.038
L&T Emerging Businesses Fund  4,796 -0.72 -10.37 -3.47 7.23 NA 25.21 -0.086
Franklin India Smaller Cos Fund  5,244  -3.57  -10.56  -4.81  3.51  18.29  24.13  -0.109 
Nifty Smallcap 100 - TRI 2.48 -13.00 -8.32 0.63 12.57 32.70 -0.084
Returns are point to point and in %, calculated using Direct Plan - Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on August 19, 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.

With a spectacular performance in the recent small cap crash, ASCF has scripted an unbeatable track record of generating substantial alpha for its investors. The fund has outperformed its benchmark and category peers with a noticeable margin and has found place among the top performers in the small cap category across various time frames.

What makes ASCF far more attractive is its ability to generate returns even in conditions where most of its small cap peers have been struggling to limit downside. ASCF has registered far lower volatility (standard deviation) when compared to its similar category peers and the benchmark. The cautious investment approach followed at the fund house has helped ASCF deliver superior risk-adjusted returns for its investors.

Investment strategy of Axis Smallcap Fund

ASCF is mandated to invest a minimum 65% of its assets in equity & equity related instruments of small cap companies. Accordingly, ASCF endeavours to invest primarily in high conviction small cap stocks. It also holds significant exposure of about 10-25% in midcaps.The fund house employs a 'Fair value' based research process to analyse the appreciation potential of each stock in its universe. The universe of stocks is carefully selected to include companies having robust business models and enjoying sustainable competitive advantages as compared to their competitors.

When building the portfolio, the fund management team follows a bottom-up approach to investing with focus on appreciation potential of individual stocks from a fundamental perspective. It seeks to identify long term businesses, keeping in mind risk and reward, by containing mistakes and navigating volatile stock movements.

The fund house believes that the key to successful investing in smallcaps is patience and the ability to withstand short-term volatility. ASCF utilises a holistic risk management strategy, in order to manage risks associated with investing in equity markets.

Graph 2: Top portfolio holdings in Axis Smallcap Fund

Graph 2 Graph 2
Holding in (%) as on July 31, 2020
(Source: ACE MF)

ASCF is selective in its stock picks and invests in a fairly diversified portfolio of about 35-45 stocks. As on July 31, 2020, ASCF held 47 stocks spread across small and mid cap space. Among its top holdings the fund held names like Galaxy Surfactants, JK Cements, Can Fin Homes, Aarti Industries, and Fine Organic Industries. The top 10 stocks in the portfolio together accounted for around 37.3% of its assets. The fund does not follow an over-diversification strategy and holds meaningful exposure in each stock it has in the portfolio.

ASCF has benefited from its exposure to stocks like Coforge (earlier known as NIIT Technologies), Neogen Chemicals, Galaxy Surfactants, Ipca Laboratories, Fine Organic Industries, JK Cement, etc., which have turned out to be the major contributors to its performance in the last one year.

Chemicals dominate ASCF's portfolio with an allocation of close to 20%. Financials account for another 15% in the portfolio. The presence of Cement, Construction and Engineering among the top sectors indicates that the fund manager anticipates benefits from economic recovery. The fund also holds significant exposure in Infotech, Consumer Durables, Consumption, Health Services, Auto ancillaries and so on. Overall, the fund's portfolio is well positioned to participate in the market recovery.

Suitability

ASCF has been agile enough to take advantage of various investment opportunities present in the small-cap space as well as mid-cap segment. It aims to invest in high growth-oriented quality stocks available at attractive valuations and hold it with a long term view until full potential is derived. Despite being a growth oriented small cap fund with an aggressive nature, ASCF does not resort to taking aggressive calls or momentum bets and focuses on quality. This improves its chance of riding out tough market conditions. The aggressive investment mandate along with higher allocation to mid caps makes ASCF suitable for investors having a higher risk appetite and a long term investment horizon of at least 5-7 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.

Join Now: PersonalFN is now on Telegram. Join FREE Today to get ‘Daily Wealth Letter’ and Exclusive Updates on Mutual Funds

 

DISCLOSURE AS PER SECURITIES AND EXCHANGE BOARD OF INDIA (RESEARCH ANALYSTS) REGULATIONS, 2014

About the Company including business activity

Quantum Information Services Private Limited (QIS) was incorporated on December 19, 1989.

QIS was promoted by Mr Ajit Dayal with an objective of providing value-based information/views on news related to equity markets, the economy in general, sector analysis, budget review and various personal products and investments options available to the Public. It was the first company to start equity research on an institutional level.

'PersonalFN' is a service brand of QIS and was started in the year 1999. In 1999, the Company registered the Domain name www.personalfn.com for providing information on mutual funds and personal financial planning, financial markets in general, etc. and services related to financial planning and research in various financial instruments including mutual funds, insurance and fixed income products to customers. It offers asset allocation and researched investment recommendations through its financial planning services.

Quantum Information Services Private Limited (QIS) is registered as Investment Adviser under SEBI (Investment Adviser) Regulations, 2013 and having Registration No.: INA000000680. In terms of the second proviso to Regulation 3 (1) of SEBI (Research Analysts) Regulations, 2014 the Company is not required to obtain Certificate of registration from SEBI.

Disciplinary history

There are no outstanding litigations against the Company, its subsidiaries and its Directors.

Terms and condition on which its offer research report

For the terms and condition for research report click here.

Details of associates

  1. Money Simplified Services Private Limited;

  2. PersonalFN Insurance Services India Private Limited;

  3. Equitymaster Agora Research Private Limited;

  4. Common Sense Living Private Limited;

  5. Quantum Advisors Private Limited;

  6. Quantum Asset Management Company Private Limited;

  7. HelpYourNGO.com India Private Limited;

  8. HelpYourNGO Foundation;

  9. Natural Streets for Performing Arts Foundation;

  10. Primary Real Estate Advisors Private Limited;

  11. HYNGO India Private Limited;

  12. Suresh Lulla;

  13. I V Subramaniam.

Disclosure with regard to ownership and material conflicts of interest
  1. ‘subject company’ is a scheme on which a buy/sell/hold view or target price is given/changed in this Research Report;

  2. Neither QIS, it's Associates, Research Analyst or his/her relative have any financial interest in the subject Company;

  3. Neither QIS, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one per cent or more securities of the subject Company, at the end of the month immediately preceding the date of publication of the research report;

  4. Neither QIS, it's Associates, Research Analyst or his/her relative has any other material conflict of interest at the time of publication of the research report except that QIS (PersonalFN) is, as per SEBI (Mutual Funds) Regulations 1996, an associate / group Company of Quantum Asset Management Company Private Limited and Trustees and Sponsor of Quantum Mutual Fund (QMF) and to that extent there may be conflict of interest while recommending any schemes of QMF. However, any such recommendation or reference made is based on the standard evaluation and selection process, which applies uniformly for all Mutual Fund Schemes. The payment of commission (upfront / annualized & trail), if any, for any Schemes by QMF to QIS (PersonalFN) is also at arm's length and as per prevailing market practices.

Disclosure with regard to receipt of Compensation
 
  1. Neither QIS nor it's Associates have received any compensation from the subject Company in the past twelve months;

  2. Neither QIS nor it's Associates have managed or co-managed public offering of securities for the subject Company;

  3. Neither QIS nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject Company;

  4. Neither QIS nor it's Associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months.

  5. Neither QIS nor it's Associates have received any compensation or other benefits from the subject Company or third party in connection with the research report

General disclosure
  1. The Research Analyst has not served as an officer, director or employee of the subject Company.

  2. QIS or the Research Analyst has not been engaged in market making activity for the subject Company.

Click here to read PersonalFN's Mutual Fund Rating Methodology

Subject Company means Mutual Fund Schemes

Quantum Information Services Private Limited CIN: U65990MH1989PTC054667 Regd. Office: 103, Regent Chambers, 1st Floor, Nariman Point, Mumbai - 400 021 Corp. Office: 103, Regent Chambers, 1st Floor, Nariman Point, Mumbai - 400 021.

Email:info@personalfn.com Website: www.personalfn.com Tel.: 022 61361200 Fax.: 022 61361222 SEBI-registered Investment Adviser. Registration No. INA000000680, SEBI (Investment Advisers) Regulation, 2013




Add Comments