Largecap investing over the years has become quite a tough job when it comes to beating Nifty/Sensex. With funds now being benchmarked against the total returns index i.e. including dividends, the job has become only tougher.
Plus, regulatory rules have made it rather difficult for largecap funds to add growth boosters in the form of midcap and smallcap funds in the guise of ‘largecap’ label. In the last one year period ended Nov. 6, 2019, a 92% of all largecap funds have failed to match Sensex TRI (Total Return Index)’s 16.99% return. In the last three-year period, the Sensex’s 15.42% has proved to be tough to beat for 95% of largecap funds. Clearly, alpha generation i.e. giving excess returns over a basket of stocks such as Sensex TRI has become quite difficult.
But, there are always some funds that challenge prevalent notions. The notion that largecap funds find it impossible to beat benchmark indices goes out of the window when we look at the stellar performance of Axis Bluechip Fund. This fund, earlier known as Axis Equity, is the chart-topper when it comes to actively managed largecap funds. In the last one year when the Sensex TRI has given 16.99% return, Axis Bluechip Fund has gained 23.84% — a 6.85% points more than the benchmark. In the last 3 year period, Axis Bluechip Fund has generated 17% annualised gain compared to the 15.42% rise in Sensex TRI.
What is the magic sauce behind Axis Bluechip Fund’s chart-topping returns in these years? RupeeIQ delves deep into this fund’s performance.
Fund manager change
Just a few days before the ending of November 2016, the infamous month when ‘demonetisation’ happened, Axis Mutual Fund decided to change the fund managers for some of its equity funds. One fund was Axis Equity Fund, the earlier name for Axis Bluechip Fund. This change of fund manager happened with effect from November 23, 2016 when Shreyash Devalkar stepped in to manage the fund.
Though fund houses and independent MF tracking outfits like RupeeIQ would not want to attribute the success of a fund entirely to a fund manager, sometimes it is important to recognise the contribution.
Before Shreyash Devalkar was made the fund manager of Axis Bluechip Fund, the fund’s performance in the immediate previous periods was pedestrian. For instance, in the one year period ended November 23, 2016, the fund was fourth worst performer among all the largecap funds in the Indian MF industry. In the three year period ended November 23, 2016, Axis Bluechip Fund generated 12.51% annualised gain — giving it the rank of 32nd out of 64 funds.
Today, when Devalkar is about to complete three years as official fund manager of Axis Bluechip Fund, the story is completely different. Axis Bluechip Fund is the best performer among all largecap funds, including passive products, in the last one year period. The Rs 8,000-crore fund has beaten biggies such as ICICI Prudential Bluechip Fund, SBI Bluechip Fund, Aditya Birla Sun Life Frontline Equity Fund and HDFC Top 100 Fund. In the last three year period, Axis Bluechip Fund is again the best performing actively managed largecap fund with more than 2.5% point lead ahead of the next actively managed largecap fund i.e. Sundaram Select Focus Fund.
The secret sauce
An equity fund is usually as good as its stocks i.e. its portfolio. But given that all largecap funds can invest only in the top 100 stocks, as defined by rules, there is little wiggle room for any largecap fund to put in other stuff.
We took a look at the September 30 end portfolio of funds. Axis Bluechip Fund has stocks that many other fund managers have in their portfolio. For instance, its top weight stock is HDFC Bank. The leading private sector bank stock is actually present in the fund portfolio of as many as 546 funds. Kotak Mahindra Bank, the 2nd most weight stock in Axis Bluechip Fund, is there in 374 other funds. Infosys, the 3rd most weight stock in Axis Bluechip Fund portfolio, is present in 427 fund portfolios in total. The list is endless.
By now, you would have understood that Axis Bluechip Fund had the same playing field as other largecap funds. In fact, many of the popular largecap funds, which are languishing near the bottom of largecap fund performers’ list, also have a lot of portfolio overlap. So, what explains the out-performance of Axis Bluechip Fund vis a vis others?
Our study found out a few interesting insights.
1. The concentrated portfolio approach
Axis Bluechip Fund has a concentrated portfolio approach. The fund has about two dozen stocks in its portfolio.
This is different from what many other popular largecap funds have done. For instance, Franklin India Bluechip Fund has over 30 stocks. Nippon India Large Cap Fund has over 40 stocks. HDFC Top 100 Fund, SBI Bluechip Fund and ICICI Prudential Bluechip Fund have 50 stocks each. Aditya Birla Sun Life Frontline Equity Fund has nearly 60 stocks.
How does concentration help? A concentrated fund has fewer bets. So, the weight to a stock is more. This means if the concentrated bets work, the effect of each bet is more pronounced on the portfolio than say, a fund which has a large number of stocks. For instance, both Axis Bluechip Fund and Aditya Birla Sun Life Frontline Equity Fund have Kotak Mahindra Bank stock. The Axis scheme has nearly 9% weight while the Aditya Birla Sun Life scheme has less than 2% of portfolio in Kotak Mahindra Bank stock. In the last one year, the bank stock has jumped 40%. So, naturally the positive effect on NAV of Axis Bluechip Fund from Kotak Bank is four times more than in Aditya Birla Sun Life Frontline Equity Fund.
The flipside of running a concentrated fund portfolio is that when bets do not work or fail, the impact of such mis-hits are also pronounced. This is why fund managers prefer to run large portfolios with an aim to diversify. However, owning a large number of stocks can backfire if the stock market, like what is happening in India right now, is running on a few legs i.e. a few stocks.
2. Avoiding worst-hit sectors
Axis Bluechip Fund has managed to avoid the worst-hit stocks/sectors. In the past one year, metal sector, auto sector, healthcare sector, telecom sector, basic materials and infrastructure sector have not done well. In the past three year period, telecom, auto, healthcare, metal and PSUs have not done well.
There is an old market saying: “Lose less to win more”. The Axis Bluechip Fund personifies this saying in many ways. We will illustrate why we are saying this. The automobile sector has been in the doldrums and stocks of major companies have lost a lot of value. Axis Bluechip Fund portfolio (as on September 30, 2019) has only one auto stock – Mahindra & Mahindra (M&M) and this stock has less than 0.5% weight in the overall portfolio.
Compare this to funds like ICICI Prudential Bluechip Fund that has nearly 7% of its portfolio in auto stocks such as Motherson Sumi (down 22.9% in 1 year), TVS Motor (down 16.2%). Automobile stocks have a good weight in SBI Bluechip Fund (M&M, Motherson and Hero MotorCorp). Nippon India Large Cap Fund has over 8% weight in automobile sector, with picks like Ashok Leyland (down 37%), Bharat Forge (down 21%) and Tata Motors (down 12%). Many popular largecap funds have between 3-7% weight in auto stocks.
Axis Bluechip Fund also seems to have avoided the decline in metal stocks. Peers like Nippon India Large Cap Fund and HDFC Top 100 Fund (Tata Steel down 30% in 1 yr), Mirae Asset Large Cap Fund (Tata Steel and Hindalco which is down 15%), Franklin India Bluechip Fund (Hindalco), DSP Top 100 Equity Fund (Tata Steel), JM Large Cap Fund (Tata Steel, Vedanta which is down 23%) were in part dragged down by metals.
3. Quality stock selection
Axis Bluechip Fund’s stock selection has been great. The stock market at the moment is giving preference to quality and growth over valuation. Axis Bluechip Fund seems to have foreseen this trend and created positions in such stocks for whom the rest of the market would not mind paying a premium.
As a result, the Axis Bluechip Fund’s portfolio P/E (price to earnings valuation) is one of the highest at 36 times. In comparison, the stocks bought by peer largecap funds are trading at lower valuations but their performance has not been able to rival the Axis MF scheme. For instance, HDFC Top 100 Fund has a portfolio P/E of 16 times. Nippon India Large Cap Fund and JM Large Cap Fund portfolios have a P/E of about 22 times. ICICI Prudential Bluechip Fund and Aditya Birla Sun Life Frontline Equity Fund each have a portfolio P/E of 23 times. SBI Bluechip Fund (25 times), and Kotak Bluechip Fund (26 times) have portfolios that have lower valuations than the Axis MF scheme.
There can be two conclusions that we can derive from the portfolio P/E valuation stats. One, Axis Bluechip Fund has stocks that trade at higher valuations. Two, the portfolios of other largecap funds have stocks that have been de-rated and thus trade at lower valuations. We find both conclusions meaningful for Axis Bluechip Fund. For instance, Axis Bluechip Fund has stocks like Avenue Supermart that trade at over 100 times trailing earnings. Chemical stocks like Asian Paints, Pidilite, and Astral Poly trade at 60-70 times P/E. FMCG stocks like Nestle India and HUL trade in 70-80 times P/E range.
Apart from M&M, Axis Bluechip Fund has no stock that has delivered negative returns in last one year period and three year period. Axis Bluechip Fund stocks like Bajaj Finance, Bajaj Finserv, Asian Paints and Nestle India have delivered massive returns in the above periods. The concentrated investment approach of the fund has helped amplify their effect on NAV.
|Axis Bluechip Fund – top holdings|
|Stock name||Sector||% of fund assets||1 year stock return %||3 year stock return %|
|Kotak Mahindra Bank||Financial||8.99||39.61||25.19|
|Tata Consultancy Services||Technology||3.76||13.24||23.33|
|More than 1 year stock return is annualized – indicates stock has no 3 year track record|
In a limited stock universe like largecaps, Axis Bluechip Fund has done a commendable job of generating alpha. It is clear that the fund has been able to do so by firstly avoiding losers, secondly it has not been afraid to pay for growth and quality even if it seems expensive, thirdly the stock weights have been primed to perfection in many cases in this concentrated market rally that we have seen for many months now.
We do not think Axis Bluechip Fund’s performance is due to active cash calls alone. The fund has so far been able to maintain its performance despite the fund size going up by nearly 300% in just a matter of 18 months. This has meant a large amount of cash in the form of inflows has come in and the fund has deployed it cautiously.
However, we must caution investors that basing investment decisions only on historical returns may not be a good idea. Only a handful of funds are able to sustain performance over a long period of time.
Disclaimer: Views expressed here in this article are for general information and reading purposes only. They do not constitute any guidelines or recommendations on any course of action to be followed by the reader. The views are not meant to serve as a professional guide/investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product including mutual fund.