The secret to Axis Mutual Fund schemes being leading performers across equity fund categories is having an understanding of the fundamental strengths of good quality businesses run by capable management, according to Chandresh Nigam, MD and CEO. He believes the markets are set to gain some more as the economy sets on a path of recovery over the next few quarters
Do you attribute the outperformance of Axis Mutual Fund’s equity funds to its investment strategy? Does it work across market cycles?
Axis Mutual Fund has a clearly defined and disciplined investment process. It was put together taking into account our learnings as investment professionals over several cycles—focusing on sustainable and good quality businesses run by capable management which has the ability to grow their businesses over the long term. While no strategy is guaranteed to work in every market cycle, it is our belief that it helped us generate strong long-term performance and stand out in a tough environment when a number of poorer quality companies (not in our portfolios) struggled.
What are the fund management challenges in holding a high conviction portfolio, like Axis Mutual Fund does in its equity funds? How do you manage large investor inflows in situations like we are currently facing when opportunities to deploy funds are scarce?
The investment process has to be holistic and not in bits and parts. So you cannot have conviction in the portfolio unless you back it with strong work on understanding the fundamentals of these companies or have a strong exclusionary step that kicks out poorer quality businesses. Conviction is the logical outcome as you are happy to back the few good quality companies rather than spreading money thinly on a number of more uncertain names.
Investor flows will tend to be volatile and pro-cyclical to an extent. It is our job as asset managers to not let the flows impact our style. To that extent, we ensure that we track the capacities of our strategies closely. While temporarily, cash levels can go up or down, it is not something that we look at as a value addition to the portfolio but more like an intermediate step.
How do you reconcile the divergence between rising stock markets on one hand and the deceleration in the economy and corporate earnings on the other? Are these valuations sustainable even for quality stocks?
Ultimately, while stock markets work bottom-up, they cannot remain divorced from the broader economic environment. To an extent, this is reflected in the way a large number of companies have struggled even as a few quality companies have sustained growth. We believe that broadly, the economy is close to its bottom and we should see a slow and steady recovery over the next few quarters, which can provide some tail-wind to the markets.
The premium that quality stocks enjoy is a function of the market, recognizing their ability to better withstand macro challenges. But, in the near term, there can be ups and downs in relative valuation.
The mid-and-small-cap segment has been on the recommendation list of most market watchers. Given the deceleration in the economy, are investors taking too much risk by taking exposure to this segment?
We have been cautious on this segment. We believe quality large-cap companies are better positioned to adapt to a challenging macro environment. Over the long term, there will always be opportunities for well-run mid-and-small-cap portfolios. In today’s context, however, a large- or multi-cap bias is probably better positioned from a risk-return perspective.
SIPs have been steady, but lump sum investments are still not coming in. What is the trigger that will lead to lump sum flows resuming?
As I said earlier, there is an element of pro-cyclicality to investor money. We have seen this time and again in the last 20-25 years. It’s a bit unfortunate but it is the reality. But we are extremely pleased with the investor pivot to SIPs because that ensures regular disciplined allocations that are to a large extent divorced from market timing tendencies.
Is the credit environment still fragile or is there easing of stress? What is the space in the debt fund spectrum that looks attractive at this point for the retail investor’s core holdings?
I think some of the stress was not so much on account of operating challenges as it was a function of the lock-down in funding from the credit markets—that is a liquidity issue rather than a viability issue. We need to see a thaw in risk appetite for the market to revert to normal. We have started seeing some green shoots recently in the way some of the better NBFCs have been able to raise money from the market. I believe that barring any additional shock, we should start limping back to normalcy. The government and RBI have a big role to play to ensure the market does not face any prolonged dislocation incrementally from here.
From an investor’s perspective, there is great value in the credit space with spreads at levels that we don’t see in normal markets. Within the higher rated space, long-term (10-year) corporate bonds offer better risk-return.
A new front has been opened with regulations on debt exchange-traded funds (ETFs). Does passive investing work effectively in debt investments?
For any idea to take off, it needs to answer a simple question—which investor need is it going to solve. I think there is a lot of scope for innovation in the fixed-income space and we will see a lot of things being tried going forward. I think it’s premature at this stage to guess which ideas may win.