Jinesh Gopani, head (equity) and fund manager of India’s largest equity-linked savings scheme (ELSS), Axis Long Term Equity Fund of Axis Asset Management Co. Ltd, speaks about his outlook for the macro economy and the performance of the fund. He also explained why he is sceptical of ‘value’ companies and his preference for the growth style of investing
Consumption is seeing a slowdown as you can see from the latest results of consumer goods companies. Where will growth come from?
We are also trying to find that out. After demonetisation, GST (goods and services tax) and credit crisis, things are pretty volatile. Companies are taking very short-term views in terms of demand patterns. Liquidity crisis is the biggest issue at present. Even rural growth has slowed. On a call, a major consumer goods company said rural growth is 1x (the same as) urban growth; earlier they used to say it’s 2x (two times) urban growth. We will have to see how liquidity comes back into the system.
The June quarter might be sluggish due to the election factor where demand patterns might not be great. Then you have monsoon and after that you have the festive season where the base effect kicks in, in a big way because last year Kerala had a bad run due to the flood. Consumption during the festival of Onam was very bad. That is where the base effect kicks in and most consumption patterns will change post that. Oil is high, fiscal deficit is high and by September, you will even have the inflation base effect kick in. In that scenario, how they prop up growth will be critical. We will have to wait for the budget and what kind of stance they take to pump prime growth.
Axis Long Term Equity Fund has had a challenging year. Its one-year return is around 5% compared to 8.6% on BSE 200 (Total Returns Index). How do you reassure your investors?
If you compare with peers, we are still in the top quartile, so we are not worried.
The index has narrowed down significantly. Only about seven stocks are keeping markets where they are and mid-caps are crashing down. From that point of view, beating the index at this point is an issue. But we are positive compared to peers. Normally, if you take the last 10-20 years, mid-caps register a 4-5% outperformance on average. Delivery of numbers in mid-caps was not to the extent suggested by valuations. After demonetization, there was a huge inflow into mutual funds and some insurance products. Most of the money came into mid- and small-caps. Some small-caps are as large as ₹7,000-8,000 crore and mid-caps as high as ₹20,000 crore. Money has been parked there and people were buying on the hope that things will improve. Demonetization had a two-three -quarter impact and then you had GST. When there is a tectonic shift like GST, there is more impact on mid- and small-caps since there is less tax compliance in this space. Their supply chain gets broken and they have to regain the trust of distributors. The process takes 12-18 months. Along with that you had a liquidity crisis. In the last three quarters, numbers have not been up to the mark in the mid-cap space.
You have a more concentrated portfolio than your peers. Financials account for about 42%. Even the index provider is debating capping the share of finance.
Finance, consumption and auto are clear GDP multipliers. India is an under-penetrated market. There is huge scope for private banks to take market share from public sector banks. To that extent, we are very happy with our portfolio. GDP is 10-11% nominal so credit growth is 12-14%. If the latter doesn’t come, GDP growth can’t come. You need money for investment and infrastructure development. The financial sector is one of the best to be in from a long-term perspective. The number delivery has been very good. The sector is domestic growth-driven in an economy like India which is itself a domestic consumption-driven market.
Infrastructure or engineering procurement construction companies are order book-driven. It is hard to take a big call in them.
Housing finance is a sub-component of the financial sector. Any concerns about this segment?
We have a couple of investments in that. They have done well for the last 30 years. They have the best return on equity (ROE) and growth rates in the industry. As a segment, there is huge demand and there can be huge supply in terms of affordable housing. Of course, there have been excesses in this segment. Many companies that had gone berserk in the last three years are feeling a liquidity pinch. You are investing in a long-term asset and funding is short-term. But wherever we have invested, we don’t see any problem. In fact, they will come out as big winners once the mess gets resolved.
You have gone for high-valuation companies.
We have not gone for them. They have become high-valuation companies. After the global financial crisis, huge filtration of stocks has happened across the world. People have moved from buying everything to buying only quality. In India, there are only limited companies with good governance. If an FII (foreign institutional investor) wants to invest in India and wants peace of mind, it will park it in bluechips. There are only those 70-80 companies. You can do cyclical trades in the rest. Even in private sector banks, there are only four large names. Even in non-banking finance companies (NBFCs), people only want to buy two-three NBFCs; two years ago, they wanted to buy 30 NBFCs. I am happy paying a higher price for growth and good quality management rather than taking bets on value traps. We go for growth as a philosophy.