‘Don’t see large-cap tilt as a constraint’

A late entrant in the mutual fund industry, Axis still has a set of funds that have performed quite well over the past three-four years.

Pankaj Murarka, Head-Equity, Axis Mutual Fund, talks with Business Line about the fund house’s strategy for chasing growth and managing risk to generate top-quartile returns. Excerpts:

Despite market volatility and polarisation in sectors since your entry, funds such as Axis Equity and Axis Long-Term Equity have done well. How have you managed this even though larger and well-established houses are struggling?

Our investment philosophy is to focus on high-quality businesses which can generate superior returns over the medium to long term. We don’t take cover against risk by taking cash calls; we remain close to fully invested. We, instead, have a three-tier structure of managing risk. The first is managing it at the product level, where we have to ensure that the product delivers returns within that risk framework.

The second is at the investment process level and the third is about active monitoring and review of portfolio.

For instance, Axis Equity Fund has a defined risk metric which says that the risk of the fund at any point in time will be lower than its benchmark — the Nifty Index. Axis Equity is the only fund out of the 300 odd funds that exist in the country to have a specific risk target.

It is always easy to get a few percentage point higher returns by taking significantly higher risks. But it may not be in the best interest of investors. So, our focus is not absolute returns, but risk-adjusted returns.

There is a large-cap tilt in both Axis Equity and the Long-Term Equity funds. Given that they have all run up, how much growth can you expect from large companies, going forward?

We have been overweight on healthcare, IT and consumer goods in these funds and they have done reasonably well.

Since our natural bias is growth, we are looking at companies that can deliver sustainable high growth. We don’t see the large-cap tilt as a constraint. Companies in India are yet to achieve global size and scale and they can still grow significantly. For example, TCS has $14-odd-billion of revenues. In the global context, IBM does $60 billion of services revenues and Accenture does $30 billion. We still have a long way to go. Likewise, in many other businesses, the growth potential is enormous. There are still a lot of high-quality businesses that are working at 1.5-2 times the nominal GDP growth. That, to our mind, is very high growth.

What are the investment themes that may play out this year?

We should see a fair bit of recovery in domestic cyclicals. The domestic manufacturing sector has borne the biggest brunt of the sharp slowdown.

Over the last 10 quarters, economic growth has come down to 4.8 per cent from 9.3 per cent. As we get more confidence and as we correct our macro-economic imbalances, it should revive.

Experts seem divided on the revival prospects for the economy. While some recommend buying beaten down stocks, others argue against it. What are your views?

We believe we are near the trough. However, a recovery will be a protracted one. While next year will be better than this year, it may not be substantially better. Any meaningful uptick is at least four quarters away.

Fiscal deficit and inflation are high; the currency has borne the brunt of it.

We started the process of correcting both, but it will happen gradually and slowly.

Having said that, I still believe there will be a mean reversion and we will go back to the mean growth rate or the potential growth rate, which the central bank defines at 6-6.5 per cent.

Given that elections are around the corner, would it be safer to have a defensive portfolio?

From a one-year perspective, we think that the outcome of the election doesn’t matter much from the point of view of economic activity.

But from a medium to long-term perspective, it does have implications in terms of policy-making and confidence. One would expect an improvement in the policy-making environment so that people will be encouraged to go out and invest more, which is the need of the hour.

That said, when it comes to portfolio construction, we do not think of politics.

We are more focused on looking at our companies. We do not consider political uncertainty as a significant risk except for some volatility which it might create around the elections.

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