How Axis Mutual Fund plans to turn around its ship now

Fund house has new team, strategy in place as it looks to put front-running scandal behind it. (iStockphoto)
Fund house has new team, strategy in place as it looks to put front-running scandal behind it. (iStockphoto)

Summary

It’s been a little over a year since a massive front-running scandal erupted at Axis Mutual Fund. The firm has since set its house in order and is now readying for a fresh innings.

It’s been a little over a year since a massive front-running scandal erupted at Axis Mutual Fund. The firm has since set its house in order and is now readying for a fresh innings.

In May 2022, the asset management company (AMC) sacked its chief dealer Viren Joshi, for suspected front-running. Market regulator Sebi, in February this year, restrained Joshi and 20 entities from accessing the capital markets. Front-running refers to individuals aware of upcoming large trades putting their own order first so as to profit when the large order moves the stock. The scandal, accompanied by poor performance of the fund since 2021, took a toll on its management.

Axis MF soon decided it was time for a total makeover. It embarked on a massive restructuring of its management—it appointed a clutch of senior executives to lead the second coming and went back to the drawing board to give shape to a new strategy.

Yet, how exactly does Axis Mutual Fund plan to resurrect itself? Read on.

New folks at the helm

Early this year, B. Gopkumar took over as the chief executive officer (CEO) and Ashish Gupta as its new chief Investment Officer (CIO) . This was followed by the exit of Jinesh Gopani as head of equity in August. Shortly after, the firm elevated fund manager Shreyas Devalkar to this role.

The fund house now plans to hire a chief risk officer (CRO), chief financial officer (CFO), and a new chief operating officer (COO). The overarching theme here is to ensure that there is no concentration of power in a single individual.

The new CIO also plans to hire several fund managers who employ different styles such as growth at a reasonable price (GARP), value, and quant. Some have already been appointed. For instance, Karthik Kumar now runs Axis Quant Fund. More importantly, Gupta will give fund managers functional independence rather than impose his own style on them.

 

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What happens to growth style?

Earlier, Gopani was both CIO and the head of equity. His signature growth style had given Axis MF its stellar outperformance in 2018-20 and propelled its rise, briefly as India’s largest fund house on the equity side (it is now the fourth largest). However, this style ceased to be effective after 2021, causing the fund to underperform.

The key schemes of Axis MF, namely Axis Long Term Equity and Axis Bluechip, were characterized by Gopani’s growth style. These were concentrated portfolios of high-growth stocks which trade at high valuations. When growth was scarce and concentrated among a few players in 2018-20, it paid off. However, in the post-Covid broad-based market, it failed. Growth stocks lost their premium and value stocks caught up. The fund house plumbed the depths and distributors were upset about the lack of consistency.

In the revamp of its schemes though, Axis MF will not give up on Gopani’s style because it believes that investors in those schemes continue to believe in the growth style. However, the portfolios will be less concentrated, a process that is already underway in Axis MF. Axis Midcap and Small Cap Fund have delivered better performance than its flagship funds precisely for this reason.

Another issue is the significant cash holding in the schemes. Gopani was focused on growth stocks only and preferred holding cash rather than increasing the number of stocks in the portfolio. This became a drag on performance. Gupta plans to cut down on this policy of high cash holding.

Tackling fraud

Axis MF has implemented a series of damage-control measures in the wake of the front-running scandal. All orders from the fund manager to the dealer will be routed through a Bloomberg software system for facilitating trades on the electronic trading platform and will only be visible to the two of them. Employees of other teams like operations and compliance will get to see these messages only at the end of the day, after trading hours. Compliance measures will be automated in the Bloomberg system.

Also, orders given to brokers will be visible on group chats and will not be one-on-one. Brokers will be selected on the basis of an internal voting system or on the availability of stock in case of block trades. There will be a rotation of dealers between fund managers. The fund house will track volume and price spikes and ensure trades are not done at prices that are widely different from market prices. There will also be a monthly audit of the trades by audit firm Grant Thornton.

Will it all pay off?

Will Axis MF’s revamp work? That, however, is difficult to predict. For instance, Dhirendra Kumar, CEO of Value Research, takes a dim view of the changes. “I’m cautious on the revamp for multiple reasons. A wholesale change in top management and strategy is likely to be disruptive. Fund managers need to be aligned with the top management and I’m not sure if that will hold true for those hired by the previous management. Think of episodes of fund managers sticking out their neck and getting criticized for it, such as buying new-age IPOs (initial public offers) in 2021. Backing from the top is crucial in fund management. When risk aversion sets in, schemes become index fund-like and not truly actively managed," he said.

“Moreover, Sebi orders against the AMC are still pending. If these ultimately hurt confidence and profits, there could be a loss of morale. Fund managers might become less incentivized to perform. All things considered, there are still a lot of dark clouds and these need to clear up before Axis Mutual Fund can bounce back," Kumar added.

Kaustubh Belapurkar, director of funds research at Morningstar, said that it’s probably a wait-and-watch situation for now. He said that Axis MF has been traditionally a growth-style manager so investors need to wait and watch how it will go about implementing new strategies .

“Losing an experienced hand like Jinesh (Gopani) is a loss for Axis MF but the good thing is that Shreyas has been here for a while now," said Belapurkar.

From an investor’s point of view, it’s important to diversify across different strategies like growth, value, and growth at reasonable price (GARP) style as every strategy goes through different cycles, Belapurkar said. “An investor needs to bring in diversification to get an evergreen portfolio because its hard to predict the performance of any particular style."

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