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'Companies that can withstand the long-term revenue vacuum will be winners'

Shreyash Devalkar, Fund Manager of Axis Bluechip, Axis Multicap and Axis Midcap Funds talks about how severe the impact of the crisis will be

'Companies that can withstand the long-term revenue vacuum will be winners'

Your large-, mid-, and multi-cap funds have contained downside well in the last one year. What's responsible for this?
The last decade has seen markets favour quality and growth as an investment style. Our fund house has been a staunch believer in quality and growth and by virtue of this investment philosophy, our funds have done well.

We have a bottom-up approach to investing. A key hallmark has been its benchmark-agnostic portfolio construction, targeting leaders and challengers. In an environment dominated by the unknown, sticking to the market leaders and those with a proven track record has worked well both in rising and falling markets.

The strategy that forms a core part of our investment philosophy for the year is 'survival of the fittest'. As we see earnings downgrades across the board, companies that have the ability to withstand the long-term revenue vacuum will be winners as the cycle recovers. The trade over the last quarter has been to identify companies with high cash flows and low leverage.

Your funds have high cash holdings of about 17-18 per cent. How much are these responsible for your fund's outperformance?
The cash levels across my funds have been around 15 per cent for more than two years now. In some months, they were lower; in others, they were higher. The cash level has been the outcome of a narrow set of companies delivering on expectations over the last two years. Only a few sectors delivered on growth, while others failed. The outcome of that is a concentrated portfolio.

That said, the underlying portfolio has undergone changes over the last two years, though cash levels are high. The intent of the funds is not to hold large cash positions but to invest in a staggered manner. As and when economic activity gets broad-based, one can see higher cash deployment and more number of stocks.

In the times like the last two years, I think what matters more than absolute cash levels is what you hold in the remaining 85 per cent of the portfolio.

Mid caps take longer to recover from an economic downturn. They also have a high casualty rate when the times turn bad. What should investors expect from your mid-cap fund amid such circumstances?
In my opinion, one should not single out the mid-cap segment to be vulnerable. The companies which are leaders in a particular segment and have net cash or very low debt are as good an investment as large caps. One can notice during this fall that such mid caps have outperformed large caps, especially those in the large-cap financial- services sector. Mid caps as a pack may underperform if there is mid-cap-specific risk aversion, which I have not noticed so far. The mid-cap space offers an eclectic mix of market leaders and well-run niche businesses that we believe can withstand the downturn and rebuild as and when the economy reopens.

What's your outlook for the market for the next one year? How severe will the after-effects of the pandemic be?
The current situation is still a health crisis. We are already seeing green spots emerge as the government has lifted restrictions in select regions of the economy. The 'people first' approach of the government is commendable and should help the economy recover faster and healthier. Unfortunately, for us, markets will remain uncertain till the time a cure is found. Volatility is likely to remain elevated. While we remain cautious, we believe the reasonable valuations could be used as an opportunity to top up existing investments in a staggered manner.

Regardless of the path that the virus takes, it is important to note that ultimately it is more of a temporary disruption that the economy will come out of.