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

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. This fund is becoming a hot favourite amongst investors looking to put money for long-term wealth creation. In this post, I shall review this fund backed with research into its performance, portfolio and 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. The fund has an AUM of over ₹8,800 crores. Most admirably, the asset base of this fund was just ₹700 crores some three years back. And since then, has grown by 12 times. This exponential rise is entirely attributable to the brilliant fund performance delivered by the AXIS fund management team.

2. The Axis Focused 25 Fund (Direct plan) is one of the best performing funds over a 5 year period. The fund has delivered returns of 13.89% per year over this 5-year period. Which means – 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. 

In SIP investments too, we see wonderful capital appreciation. 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 monthly SIP in Axis Focused 25 Fund would grown your investment by an absolute return of 47%
A ₹10,000 monthly SIP in Axis Focused 25 Fund would have profited you ₹2.76 lacs in five years

3. An investor friendly move, the fund has one of the lowest fund management expenses among actively managed focused equity funds. The expense ratio for the direct plan is just 0.65%. This is the fourth lowest in terms of expenses among the 22 focused equity funds. This speaks volumes of the fund house as it continues to ensure 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.

A focused equity funds requires selecting a compact list of 25 companies from a pool of over 500 companies. This huge universe consists of companies that are listed and traded on the Indian stock exchanges. The exercise itself is quite challenging.

Perhaps, that is why the fund management team for the Axis Focused 25 Fund follows a clearly defined selection criteria. We shall discover this 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. This is where a higher weightage is given to a business’s ability to grow predictably, generate incremental free cash flow and maintain industry leadership. 

Now predictable growth, rising free cash flows and industry leadership do come at a premium. A growth style of investing is reflective of that and allows the fund manager to pick companies at a valuation that might be higher than it’s benchmark. 

Tell me more.

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

  1. Portfolio PE Ratio is high. The Nifty 50 PE Ratio is currently at 28.4. Axis Focused 25 Fund’s PE ratio is a much richer 38.2
  2. PS Ratio is high. The Nifty 50 Price per sale or PS ratio is 1.7. Meanwhile the Axis Focused 25 fund’s PS ratio is much higher at 3.2
  3. Net Margin is quite high. The Nifty 50 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 observed that the Axis Focused 25 Fund generally avoids investing in public sector enterprises. 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. The reason the fund does not invest in PSUs is on account of corporate governance & regulatory inconsistencies rather than valuations

A related article you might want to read on the subject of government shareholding is on Free Float Market Capitalization. Nifty 50 is a free float based index. This means the stocks that make up the Nifty 50 are ranked on basis the market capitalization that is outside of promoter or government based shareholding. Let me know what you think about the article in the comments section.

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. Core Portfolio

The fund has a core portfolio which comprises about 14-15 companies. These stocks those that the fund believes can offer excellent business & stock performance predictability over a 3-5 year period. Companies which are part of this “core” sub-portfolio include stalwarts like HDFC Bank, Bajaj Finance, Maruti Suzuki and Asian Paints. All these companies are industry leaders and offer predictable operating profits. Additionally they have a strong cash generation franchise

2. Cyclical Companies

The Axis Focused 25 Fund also seems to invest about 20% of its assets in cyclical companies. The fund has a 1-2 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. These investments also coincides with the government’s initiatives to revive domestic manufacturing and the construction sector. The government has introduced reduced tax rates and a ₹25,000 crore real estate stress fund to that effect.

3. Emerging Themes

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. They also 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. The construct gives clues on how to design a 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.

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 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%. Of the 24 companies, 11 of them had an ROE of over 20%. The only exception to this – the 1 of 24 company – was ICICI Bank. The reason for sub-10% ROE was the company having applied a lot of provisions which tamed it’s profitability. Over the three quarters of 2019, 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. As many as 15 of the 24 companies in the fund have an ROCE of over 20%. And 8 companies have a ROCE of over 30%

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

The reason for doing this is what Axis fund management team believes is the heart of the value creation process. They believe capital appreciate comes from having companies which have excellent ROE, a strong business, pricing power & leadership position. 

A Quick Quiz

Infact, there is one company in the Axis Focused 25 Fund portfolio which has an ROE of over 30% and also an ROCE of over 40%. If you know the answer, type out the name of that company in the comments section of this post.

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 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. They can do this 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. These businesses 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. 

The portfolio reveals that the fund management team at Axis Mutual Fund is not shy of taking bets in a controlled manner. Of the 24 stock portfolio, the investment made by this scheme is more than 1% of the market capitalization in 5 of the investee companies

Let me say that again.

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. These are some conviction bets that this fund has taken.

Summary of Axis Focused 25 Fund

1. The Axis Focused 25 Fund is one of the fastest growing funds in the entire mutual fund space. It 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

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 the fund 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. This allows the fund 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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