In this interview, Shreyash Devalkar tells us why Axis Midcap Fund outperformed in the last year and what he expects in the year forward.
What's responsible for the outperformance by your fund over the last year?
The year in hindsight has been a stock pickers' year. Opportunities for outperformance have been available to investors across large, mid and small caps. A quick evaluation of the large-cap, mid-cap and small-cap universes shows that roughly 30 per cent of stocks in each of these categories have outperformed the Nifty 50. On the contrary, the perception one gets by looking at headline mid-cap/ small-cap indices is that the stocks in these categories have not performed well at large. Also, an interesting point here is that the bulk of outperformers have 'growth and quality' attributes.
Given our emphasis on growth and quality and a bottom-up stock-picking approach, our funds have delivered alpha in the year gone by.
About 15 per cent of your assets are in cash/debt. How do you see that?
Our approach to investing, especially in the mid-cap fund, has been to deploy funds in a staggered manner. Our fund has seen its assets more than double over the last 12 months. This is despite volatile markets. We have refrained from taking large cash calls but we have remained prudent while deploying funds, especially as we go down the ladder in the mid- and small-cap universe. More importantly, we don't intend to concentrate in just a few stocks in the mid-cap space, considering liquidity and volatility in business. Due to the economic slowdown, fewer businesses are beating expectations on growth, so the opportunity available is limited.
What's the outlook for mid caps? When do you see a broad-based recovery in this space?
Year 2020, like the year gone by, will be largely stock-specific rather than being about a broad-based move. Mid caps, like their large-cap peers, will see leaders and laggards based on their ability to recover from the tough times in the last two years. We have seen several companies re-engineering the way they do business and such companies have become the darling of the stock market. As investors, our job is to identify such companies. We do not believe the year will see a 'rising tide lifts all' type of rally.
Quality stocks have seen their valuations surge. What is the way forward?
Quality stocks of the last year have seen a big run-up as investors flocked to the same 10-20 stocks they believed could ride out the turbulence in the broader market. Quality as a theme has done well consistently over the last two-three years and hence the valuations look elevated.
Growth is a key component of the quality framework and companies with strong growth numbers should see investor preference going forward as well. A point to note is that the stars of the last year may or may not participate next year. That is the evolution of quality. While the matrix remains the same, the names may differ. Hence active management even in quality is essential.
What can investors expect from your fund over the next one year?
Our portfolios over the last year have been concentrated alpha-focused. Our investment thesis last year focused on stocks that continue to deliver growth despite weak macroeconomic conditions and regulatory challenges. We believe that these companies grew at the expense of other companies with poor fundamentals.
This year we will look to play the 'survival of the fittest' theme. Companies that have rebuilt themselves amidst market forces and have the ability to grow will be the likely winners of 2020. For such companies, 2019 was a catalyst to become leaner, focus on core businesses and improve efficiencies in operations and finance. As the economy picks up, albeit gradually, such companies are likely to be well positioned to capitalise on growth and expand to new markets.