Ashish Naik, Equity Fund Manager, Axis Mutual Fund, tells us about the industries that are vulnerable to disruption, pockets that are overweight and key takeaways for investors
In the first-part of the story, we read about Axis Special Situations Fund, how Ashish Naik picks stocks, amongst other things. Now, let's continue further.
Which sectors/pockets are you overweight and underweight on? What's your thinking behind those weightings?
The fund strategy is well-diversified with IT, internet or tech sector forming 21-25 per cent of the domestic allocation. Incumbent financials are at 29-33 per cent (across NBFCs, private banks and insurance companies) as well as other sectors like:
Technological disruption has emerged as a major challenge over the last few years. Which industries are most vulnerable to it? Which are more resilient?
Innovation has made lives easier, more efficient and improved our standard of living materially throughout history. From the invention of the spinning wheel to the latest gadgets, disruption and change has been the only constant as we look to solve the greatest challenges known to man. More so in the last decade, innovation and disruption have taken on new vigour as disruption is happening at its fastest pace ever.
Every industry is getting impacted. The fourth industrial revolution (4IR) is about a whole new way of agile manufacturing using robotics and AI. Strong data privacy laws would make sure that individuals are protected while giving their personal information. In this "Digital Economy", as quoted by an eminent banker, "Geography is history". With access to the right technological backbone, businesses can be operated remotely anywhere, anytime and by anyone. This will give boost to data- and analytics-driven growth in artificial intelligence and machine-learning-based environment that eventually leads to further automation and in turn creates a virtuous cycle of disruption. No company or sector can remain isolated from these swooping changes.
Vulnerable sectors: manufacturing - automation; service industry - AI; media - OTT; logistics - technology; retail - online; IT - cloud; fossil fuel - EV; power - renewables (solar, hydrogen).
Resilient sectors: finance (lot of regulatory concerns and strong incumbents); material - yet not found replacement to basic materials; construction - 3D printing, etc., yet not feasible but may be at the horizon.
How do you see new-age businesses and listed start-ups as investment opportunities? How should an investor separate the wheat from the chaff?
New-age companies and listed start-ups have some of the most interesting ingredients that can drive disruptive growth. These firms do not carry the baggage of legacy business models and hence can be quite nimble and grow as per the current business reality. With the right kind of management team, a sound business idea can easily disrupt many large industries and we are seeing that happen in various sectors from FMCG to media to logistics. Part of the reason for this has been higher risk-taking ability given by an easy access to low-interest-rates-led PE-backed capital.
But this easy growth, even for relatively nonstarter business models that have serious scalability or execution issues, can result in massive mispricing, where unreasonable valuations can lead to bubbles. And when these businesses eventually fail to deliver on growth or profitability targets, it results in bigger cuts to the stock prices.
If an investor wants to build a thematic stock portfolio for the next five years, which themes would be your top picks? What would be your advice to such an investor?
We believe sustainability and disruption are two major themes which encompass almost every walk of life and hence affect every sector of the economy. Sustainability in the form of ESG has come out as a major investment theme and global investors have become incrementally more and more discerning of these. Given that these themes are impacting individual companies and stock returns, both positively as well as negatively, we would advise every investor to allocate a certain portion of investment corpus, outside of their core to investment, in funds based on these themes.
Source: Innosight, 2018 Corporate Longevity Forecast: Creative Destruction is Accelerating, Bloomberg, Axis MF Research (data as on January 31, 2022).
This interview was conducted in February 2022.