The ESG fund NFO, to be managed by Jinesh Gopani, starts subscription from January 22 and ends on February 5
Axis Mutual Fund has launched a new fund offer, Axis ESG Equity Fund. As you may be aware, ESG stands for Environmental, Social and Governance factors. The ESG framework is used by investment managers to identify how each company in their coverage is exposed to or are reacting to these factors. The argument for ESG investing is simple: generate long term capital appreciation by investing in companies demonstrating sustainable practices across ESG theme.
At present, SBI Magnum Equity ESG and Quantum India ESG Equity are two funds existing in this space. Let us take a close look at what Axis ESG Equity offers and how it is possibly different. Read on.
ESG investing proponents believe sustainable businesses can generate sustainable growth. This can result in compounding returns to shareholders, lower cost of capital, premium valuation, lower volatility, and reduced drawdown risk.
There is some data that shows companies/stocks that pass the ESG test can beat a portfolio of other stocks. For instance, Nifty ESG 100 index in the 2012-2019 period gained 14.5% CAGR compared to Nifty 50’s 12.9% CAGR.
Other ESG funds like SBI Magnum Equity ESG Fund, managed by Ruchit Mehta, has beaten S&P BSE Carbonex TRI over five year and seven year basis.
In its short tenure of six months, Quantum India ESG Equity Fund, managed by Chirag Mehta, has outperformed S&P BSE Carbonex TRI, though one must point out that six months performance must not be paid much attention.
Axis ESG Equity Fund is an equity thematic fund, to be managed by Jinesh Gopani.
There are three parts of the Axis ESG approach. Before we explain them, understand that conventional ESG metrics and 3rd party sources provide useful information. However, fund/investment managers feel that this information has limited investment value. They also argue that ESG analysis alone cannot lead to alpha generation. Hence, ESG needs to be seen in conjunction with other financial and business metrics.
Now, let us explain the Axis ESG approach. Firstly, the fund-house has a proprietary, forward-looking and dynamic view of ESG based on a qualitative assessment of each company. Secondly, the process has been created with inputs from Schroders – incorporating global best practices. Thirdly, all companies are evaluated using a standardised framework that uses data as well as analyst assessments.
Axis ESG Equity Fund will follow a 3-step portfolio construction.
One, there will be sector-level screening. The scheme will exclude sectors/themes that are deemed harmful from a societal perspective eg., exclude Tobacco, Liquor, Gambling stocks.
Two, there will be stock-level screening. This means there will be no investments in stocks that throw up ESG red flags as a part of the Axis MF review.
Three, the fund will practice allocation based on a detailed qualitative ESG review of each company complementing the existing fundamentals-based investment process.
Minimum 80% of the Axis ESG Equity Fund portfolio will be in stocks that rate highly on internal ESG review, the fund-house says.
Also, Axis ESG Equity Fund will invest up to 30% in global sustainable companies. This means the fund will invest directly in overseas securities. Overseas investments will be advised by Schroders. Overseas securities exposure is something that makes Axis ESG Equity Fund unique compared to SBI Magnum Equity ESG Fund and Quantum India ESG Equity Fund. Both the existing schemes do not have any overseas security exposure worth mentioning.
In SBI Magnum Equity ESG Fund, companies are scored across parameters from Governance, Social & Environmental aspects of the company’s management of its affairs. Active weights of security are determined by the ESG scores. A positive score will enable a positive active weight, and vice-versa.
Let us take a look at the SBI Magnum Equity ESG Fund portfolio. Its top holdings are HDFC Bank, Reliance Industries, Bajaj Finance, ICICI Bank, Kotak Mahindra Bank, TCS, Infosys, Axis Bank, L&T, SBI, HDFC, HDFC Life Insurance, Asian Paints, Bharti Airtel, ICICI Lombard General Insurance, Titan, etc.
While we do not immediately have info on the portfolio construction process of Quantum India ESG Equity Fund, a look at its portfolio will show what that process boils down to. We can see Quantum India ESG Equity Fund’s top holdings are HDFC, HDFC Bank, TCS, Shree Cement, Tata Chemicals, IndusInd Bank, Tata Steel, Ambuja Cement, Infosys, Marico, TVS Motor, Indian Hotels, Kotak Mahindra Bank, Tata Motors, Axis Bank, Wipro, etc.
Axis ESG Equity Fund will charge no exit load for 10% of investment if redeemed/switched out within 12 months. For remaining investment, the exit load will be 1% if redeemed/switched out after 12 months from the date of allotment.
If the investment is redeemed/switched out after 12 months from the date of allotment, there will be no exit load on the full amount.
This exit load structure is the same as the one of Quantum India ESG Equity Fund.
SBI Magnum Equity ESG Fund charges an exit load of 1% for redemption within 365 days.
Chandresh Kumar Nigam, MD & CEO, Axis AMC said, “We at Axis AMC believe that ESG is a logical extension to our philosophy given our core focus towards quality and sustainable growth. By combining ESG analysis with traditional financial metrics we can come up with a more holistic understanding of each company in our portfolio. We have faith that the Axis ESG Equity Fund by investing in a portfolio of such companies will have strong potential to offer its investors a rich source of alpha.”
As a fund investor, one of the most important things to ask is whether you need ESG to beat the market. If the answer is yes, then you should look at ESG frameworks and the ESG products on offer.
Proponents of ESG investing will, however, complain that beating the market is not the main purpose of ESG funds. What is the purpose? They will say that the main purpose of ESG investing framework is to seek out a sustainable return.
For us, ESG investing is still a theme. The thing with themes is that sometimes they do well, sometimes they don’t. When a theme works, more products arrive to cash in on the theme. Themes should not form a large part of your portfolio. Allocate a small percentage to themes. On the contrary, if you think ESG investing should be a bigger part of your portfolio, the problem is the lack of ample product choices.
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