Why are Axis Mutual Fund's Equity Schemes Overperforming? An ETMONEY Factfinder Report

The equity schemes of Axis Mutual Fund have been among the top performers for the past many years. In this detailed video, ETMONEY’s Shankar Nath examines the reasons for their superlative performance as he digs deep into the portfolio construct of the Axis Long Term Equity Fund & delivers strong insights into the fund manager’s investing style.

Your big takeaway from this video should be the 11 strategies which we think the fund management team at Axis Mutual Fund employs for not only this fund but also for many other popular funds like the Axis Bluechip Fund, the Axis Multicap Fund, Axis Focused 25 and the Axis Growth Opportunities Fund.

Topics covered in this video -
00:00 Introduction
02:44 Avoid Regulated companies
03:33 Go For Compounders
05:52 Pay for Quality
11:06 Identify Shareholder Value Creators
13:30 Invest With Conviction
14:46 11 Secret Ingredients of Axis Mutual Funds

You can check out our video on the Underperformance of HDFC Mutual Fund's equity schemes by click on the link https://youtu.be/2eq3tL4z_70

👉 STRATEGY 1 : AVOID REGULATED COMPANIES

The Axis fund management team tends to avoiding public sector companies. This is probably due to governance issues or the misallocation of capital to social objectives rather than shareholder objectives. The flipside of this stance is that the Axis Long Term Equity Fund misses out on many commodity plays in the mining, oil, gas, metals, and refining sector as those companies have heavy government shareholding

👉 STRATEGY 2 : GO FOR COMPOUNDERS

There are three primary growth metrics that Axis AMC seems to favour:
2.1 Growth in Revenue i.e. is the company progressing and capturing greater market share.
2.2 Growth in EBITDA or operating profits i.e. is the revenue or sales of the company meaningful and converting into earnings from operations.
2.3 Growth in Earnings Per Share or EPS which indicates if there is progress in the amount of profit that is being earned for every unit of ownership.

There’s a loosely defined word called “compounders” which is used to describe such type of companies that exhibit consistent and steady growth which happens on account of high-quality operations, recurring revenue, and strong franchise.

👉 STRATEGY 3 : HAPPY TO PAY FOR QUALITY

Axis MF seems happy to pay for companies available at high valuations. This is evident when we look at three important metrics that signify the quality of businesses that the fund house is investing in.
3.1 Price Earning Ratio or PE Ratio (watch the video at https://youtu.be/cGvd3e9mF_k)
3.2 Net Profit Margin which is a strong determinant of quality and a great proxy for formidable companies with a recognizable brand name, a quality product, and pricing power.
3.3 Free Cash Flow which, in our opinion, is more important than accounting profits

👉 STRATEGY 4 : IDENTIFY SHAREHOLDER VALUE CREATORS

The AXIS Mutual Fund team really examines the quality of management which includes understanding the governance practices, past record of the senior management team, executive compensation, stock options, and other policies drawn by the management from time to time. Good quality management teams are often the best value creators for shareholders

Additionally, the AMC team seems to focus on two important return metrics which are:
4.1. Return on Equity or ROE which is the amount of profit generated for every one unit of shareholder’s money
4.2. Return on Capital Employed or ROCE which measures the efficiency with which a business uses its capital. The ROCE is measured using the EBITDA as a % of the total capital employed which includes equity and debt.

👉 STRATEGY 5 : INVEST WITH CONVICTION

The Axis Long Term Equity fund and most other funds at the fund house practice focused diversification which means investing in around 30 companies with a high level of conviction.

💯Here are 11 strategies that we think the AXIS MF fund management team uses: (we've also guessed some numbers just to give our viewers a perspective)
1. Avoid public sector enterprises
2. Growth in revenue (5 year CAGR of atleast 10%)
3. Growth in EBITDA (5 year CAGR of atleast 10%)
4. Growth in EPS (5 year CAGR of atleast 10%)
5. High net profit margin (13+% for large caps companies)
6. Positive free cash flow
7. Quality management (promoter holding)
8. Return on Equity (15+%)
9. Return on Capital Employed (20+%)
10. Focused set of 30 stocks.
11. Conviction bets on select small/mid cap companies

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