How Axis Focused 25 Fund became India’s Best SIP Mutual Fund

AXIS Focused 25 Fund is one of the best SIP mutual funds in India for 2020

The Axis Focused 25 Fund shares enough merits to be labeled one of India’s Best Mutual Funds to invest in for long-term wealth creation using the SIP route. In this post, I shall be presenting my assessment of this fund backed up with research into its performance, portfolio and most importantly the fund management style.

Three Things Investors Love about Axis Focused 25 Fund

1. The Axis Focused 25 fund is one of the largest funds in the Focused Equity category with an AUM of over ₹8,800 crores. Most admirably, the asset base of this fund was just ₹700 crores some three years back and has grown by 12 times in these 3 years. This exponential rise is entirely attributable to the brilliant fund performance delivered by the AXIS fund management team which has been well appreciated by mutual fund investors

2. One of the best performing funds over a 5 year period, the Axis Focused 25 Fund (Direct plan) has delivered returns of 13.89% per year over this 5 year period. To put this performance into perspective, if you had invested a lumpsum amount of ₹10,000 just 5 years back – your money would have almost doubled by now to ₹19,160. 

And if you had setup a ₹10,000 monthly SIP, your ₹6,00,000 of investment (₹10,000 * 12 months * 5 years) would have risen to ₹8,76,159 profiting you a cool ₹2.76 lacs over these five years

A ₹10,000 monthly SIP in Axis Focused 25 Fund would have profited you ₹2.76 lacs in five years
A ₹10,000 monthly SIP in Axis Focused 25 Fund would have profited you ₹2.76 lacs in five years

3. Another investor friendly move by the management team of Axis Focused 25 Fund (Direct plan) is to have one of the lowest fund management expenses among actively managed focused equity funds at just 0.65%. This is the fourth lowest in terms of expenses among the 22 focused equity funds which ensures that investors get professional management of their money in a cost-effective manner.

How the Axis Focused 25 Fund Generate Superior Returns? 

To understand the secret to Axis Focused 25 Fund’s success, we shall look deeper at the the fund’s investment methodology and study the portfolio of companies the fund has invested into.

Selecting a compact list of 25 companies from a pool of over 500 companies that are listed and traded on the Indian stock exchange is quite an arduous exercise. And that is why the fund management team for the Axis Focused 25 Fund follows a clearly defined selection criteria which we shall discover from examining the stocks that they have bought or sold over time.

Strategy 1 – Growth style of investing

Axis Focused 25 Fund follows a growth style of investing where a higher weightage is given to a business’s ability to grow predictably, generate incremental free cash flow and maintain industry leadership. 

Predictable growth, rising free cash flows and industry leadership does come at a premium and a growth style is reflective of that which allows the fund to pick companies at a valuation that might be higher than it’s benchmark. 

Let’s see what that means when comparing Axis Focused 25 Fund with it’s benchmark i.e. the Nifty 50 Index.

  1. High PE Ratio – The Nifty 50 is currently at a PE ratio (price earning ratio) of 28.4 while the Axis Focused 25 Fund’s PE ratio is a much richer 38.2
  2. High PS Ratio – The Nifty 50 Price per sale or PS ratio is 1.7 while the Axis Focused 25 fund’s PS ratio is much higher at 3.2
  3. High NM – The Nifty 50 NM (net margin) is 6.9% while the fund’s portfolio net margin is 10.5%

This clearly shows that the Axis Focused 25 fund does not mind paying a premium for acquiring quality businesses

Strategy 2 – Avoid Public Sector Enterprises

I also observed that the Axis Focused 25 Fund generally avoids investing in public sector enterprises and there are no companies in its current portfolio that have a majority government shareholding. I reckon this is a part of their risk management policy and the fund doesn’t go for PSUs on account of corporate governance & regulatory inconsistencies rather than valuations

AXIS Mutual Fund's focused equity fund avoids investing in enterprises with majority government shareholding on account of governance issues and other inconsistencies
AXIS Mutual Fund’s focused equity fund avoids investing in enterprises with majority government shareholding on account of governance issues and other inconsistencies

Strategy 3 – Breaking into objective driven sub-portfolios

The Axis Focused 25 Fund divides its portfolio of stocks into three distinctive sub-portfolios –

  1. The fund has a core portfolio which comprises about 14-15 companies which the fund believes can offer excellent business & stock performance predictability over a three to five year period. Companies which are part of this “core” sub-portfolio include stalwarts like HDFC Bank, Bajaj Finance, Maruti Suzuki, Asian Paints – all of which are industry leaders and offer predictable operating profits & have a strong cash generation franchise
  2. The Axis Focused 25 Fund also seems to invest about 20% of its assets in cyclical companies with a one to two years perspective which helps the fund generate higher alpha. Currently, the company’s investments in V-Guard and Cummins India seem to indicate such opportunities as it coincides with the government’s initiatives to revive domestic manufacturing and the construction sector with reduced tax rates and the creation of the Rs. 25,000 crore real estate stress fund.
  3. The final sub-portfolio hangs on emerging themes where the fund has invested in 4-5 emerging businesses. These seem to be high conviction stocks that display strong future opportunities and show strong signs of being a sustainable business with a potential leadership position with earning capacity. Companies like Avenue Supermart and Endurance Technologies in the fund’s portfolio seem to fit into the emerging theme bucket.
The Axis Focused 25 Fund divides its portfolio into three sub-portfolios with investments tagged as - 1. Core portfolio, 2. Cyclical bets and 3. Emerging themes
The Axis Focused 25 Fund divides its portfolio into three sub-portfolios with investments tagged as – 1. Core portfolio, 2. Cyclical bets and 3. Emerging themes

I believe it is the combination of these three sub-portfolio that lends a solid shape to the fund. This is a good lesson for individuals who manage their own stock portfolio on how they can design their own portfolio around a core bunch of stocks, cyclical bets and emerging themes. I would certainly look at investing in this template.

Strategy 4 – Invest in Businesses with High ROE and High ROCE

I rummaged into the portfolio to understand some key metrics that the fund manager looks for when picking stocks and the AXIS Focused 25 Fund portfolio clearly seem to favour companies that deliver moderate to high ROE (return on equity) and high ROCE (return on capital employed) over the long run and on a sustained basis.

I’ll add some quick notes at the end of this section on what is return on equity and return on capital employed

I researched the November 2019 portfolio and found that 23 out of the 24 companies that the Axis Focused 25 Fund had invested in had an ROE of over 10% with 11 out of these companies offering an ROE of over 20%. The only exception to this – the 1 of 24 company – was ICICI Bank which had recently applied a lot of provisions which tamed it’s profitability. Over the three 2019 quarters, ICICI Bank has come back to its customary 14-15% ROE.

An examination of the ROCE metric reveals the fund manager has a preference for businesses with high ROCE with as many as 15 of the 24 companies in the fund having an ROCE of over 20% of which 8 companies have a ROCE of over 30%

20% ROE and 30% ROCE are astonishing numbers and the Axis Focused 25 Fund has really stocked their portfolio with these businesses. 

Infact, there is one company in the Axis Focused 25 Fund portfolio which has an ROE of over 30% and the same company has an ROCE of over 40%. If you know the answer to that (or would like to take a guess), type out the name of that company in the comments section of this post before looking at the table below

Here are the list of companies that the Axis Focused 25 Fund is currently invested into with their –

What is Return on Equity?

Return on Equity (ROE) is quite simply the profit generated by a company as a percentage of the total amount of shareholder equity*. In other words, Return on Equity signifies the amount of profit that is generated by that business for every one unit of shareholder’s money. ROE is important as a business with a high ROE is more likely to generate a lot more cash internally without having to invest too much in additional assets. Companies with a high ROE are favoured by investors over those with a low ROE.

* Shareholder’s equity is what remains when you subtract the total liabilities from the total assets of the company

What is Return on Capital Employed?

Return on Capital Employed (ROCE) measures the efficiency with which it uses it’s capital. This efficiency is measured with the operating income of the business (earnings before interest & taxes) as a % of the total capital* utilized by the business. Investors find this very useful when comparing capital-intensive businesses like telecom, utilities, energy, automobile etc. which tend to have a lot of debt in their books. A high ROCE trend is a favourable indicator of performance and is favoured by investors

* Capital employed is simply the sum of shareholders’ equity and debt liabilities

Strategy 5 – Invest with conviction on emerging superpowers

In an earlier section, I had referred to the fund’s investment in emerging themes and in high conviction stocks. 

While looking deeper into the portfolio, it is revealed that the fund management team at Axis Mutual Fund is not shy of taking bets in a controlled manner. Of the 24 stock portfolio of the fund, the investment made by this scheme is more than 1% of the market capitalization of that investee company. 

This is not the case with one odd company but there are 5 listed companies where the Axis Focused 25 Fund owns 1% or more of the company. These companies are Info Edge (Naukri.com), Cummins India, Supreme Industries, Wabco India and V-Guard Industries. 

These 5 stocks represent almost 15% of the assets of the Axis Focused 25 Fund and these are some conviction bets that this fund has taken.

Summary

1. The Axis Focused 25 Fund is one of the fastest growing funds in the entire mutual fund space and is close to crossing the ₹10,000 crores mark in the near future. The fund has delivered superlative performance for many quarters and years now and has been in the top top quartile of multicap funds often ranking in the top 3 funds from a performance perspective

2. The fund follows a clearly defined investment strategy that revolves around finding sustainable businesses with strong competitive advantages and free cash flows. It seeks out businesses with high ROE, high ROCE and high net margins – and does not mind paying a premium to acquire a stake in these great businesses.

3. Axis Focused 25 Fund divides its entire portfolio into core, cyclical and emerging themes which allows it to manage risk better and also take calculated bets to generate alpha for it’s investors

Overall, it is no surprise that I see the Axis Focused 25 Fund emerging in the charts of India’s Best Mutual Fund SIPs for 2020 in many publications.

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