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Shreyash Devalkar took over as the Head of Equity at Axis Mutual Fund in August 2023. Currently, he manages around 17 schemes of the AMC with total assets under management worth Rs 1.56 lakh crore.
In a recent interview, Devalkar discusses his journey into finance, investment mantra and strategies for managing the funds. He also provided his insights into improving the performance of some of the AMC's key funds.
Here is are some edited excerpts from the interview.
What led you to the world of finance after doing your engineering?
After completing my engineering and especially while working for two years in the industry, economies and markets were going from boom to bust cycle in the period of 2000. It was interesting to read a lot of analysis on the same and tech bubble / bust. The action in the economy and market created my interest in the field of investing.
Further, during my two-year work period post engineering involved a lot of financial and commercial aspects of project appraisals. Hence, I did my master's in management studies (MMS) to further hone my skills in the different aspects of financials. Post MMS, I entered the financial world doing various roles, including credit research analysis in banks.
When it comes to finance, and more so in equities, investment has always been an exciting profession. Investment not only includes number financial modelling, but more importantly involves understanding the company and analysing industries. It's about evaluating a business at its core level. Later, I progressed towards the factors that started affecting the market capitalisation and valuation of various companies. So, this entire journey has been exciting then and even now.
You started as a research analyst working with IDFC Securities and later with IDFC AMC. How did the migration from the sell side to the buy side happen? And what key lessons did you learn during that time?
Being a good equity analyst is core to the investment process, whether the role one plays is that of a buy side analyst or sell side analyst, or even a fund manager. Even in my current role as head of equity at Axis Mutual Fund, the effort is always to be a better analyst as that is the key to returns.
Normally on the sell-side, an analyst covers fewer sectors and hence goes deeper into a particular sector. But then you get restricted in your knowledge assimilation to a few sectors. While on the buy side (fund manager), it has more to do with multiple sectors across the board. Whether an analyst or a fund manager, it's all about taking a call on the company, and the process remains the same for both individuals.
In equities, you take risks, so obviously, there is a risk of losing capital as well. Taking that measured risk, and not trying to lose too much, is probably a fine difference between getting evolved from the sell side to the buying side. If a person is a good analyst, he has the potential to become a good fund manager. As analysts, one looks more in-depth into three-four sectors, while fund managers have to look at seven-eight sectors.
Fund managers need to choose relatively faster growing companies from multiple sectors. So then, as an analyst, you must be looking at 30-40 companies, and then as a fund manager, you have to look at 100-200-300 companies and then try to judge based on that. So, again, it is the extension of the analyst role rather than anything else.
Managing funds is a very immersive and engaging task. Being the head of equity, how do you manage 17 funds? Do you have a checklist of oversite?
So, at the AMC level, it is not about one person. We have a team of analysts and fund managers. And that's where everyone's role comes into play. So, individual sector analysts assess their sectors, and then they try to come up with the best ideas out of it. At Axis Mutual Fund, we follow a process while buying the stocks in the portfolio. As far as the equity research process is concerned, we follow a quality and growth strategy wherein we try to assess companies on these two parameters.
Analysts have to go through the universe of stocks and come up with ideas. As far as fund management is concerned, there are multiple fund managers managing the schemes, either individually or as a co-fund manager. The scheme categorisation a few years ago has made things standardised for fund management as well. There is a defined universe from which the bulk of investments get selected.
For example, if it's a large-cap fund, we have to select at least 80 per cent by weight from the top 100 companies. The interaction with the team takes place daily, and there are currently eight fund managers in the team. Some of them progressed internally while we hired few. We are also hiring a couple of more fund managers to bridge some gaps.
There are several schemes that have co-fund managers. How does that work while managing the individual scheme?
We have introduced co fund managers in last year in most schemes. With an increasing stock universe and breadth of economy, the fund manager gets help in assessing a wider set of companies. As a process it provides continuity in fund management and natural back up.
How would you define yourself as an investor - value/ growth or GARP?
In equity markets, we go into many discussions about the growth, value or growth at reasonable price (GARP) strategy. In our observation, relative growth (stocks growing better than median) is what matters, and relative growth is what tends to outperform. If the relative growth is in expensive stocks, those stocks perform well (e.g. some stocks in retail industry). If the relative growth is in stocks which are value / inexpensive, those stocks will keep on performing well.
Before March 2020 (pre-Covid 19), growth stocks were delivering higher returns. However, post-Covid 19, because of supply chain constraints, commodity flare-ups and increase in government spending, the consumption sector did not perform as expected. The relative growth was superior in the export parts, the manufacturing part and the investment part of the economy.
Before March 2020, the relative growth of the consumption part of the economy was higher for almost a decade. Having said that, the difference between consumption and other sectors mentioned above may not be higher in the long term, even though they have made higher returns in a one- to three-year period. So again, the shift in relative growth is what, in our opinion, creates the returns rather than the debate around various styles.
Mostly cycles are linked to the macro- and micro-economies but in the last three years, geopolitics has also played an additional role and probably changed the dynamics in some sectors. So, these changes have definitely changed the underlying relative growth parameters and growth scenario for the market.
What types of stocks, market conditions or investment opportunities particularly resonate with you?
We look at traditional metrics such as Porter's five force model. To start with, we must look at the structure of the industry, whether the sector is being consolidated or its growth is improving or if the competitive dynamics are changing in favour of the companies that you are holding. That's the starting point, so the next part is to look at competitive dynamics and the risk of disruption. So, we look at industry leaders, industry challengers and the industries which are consolidating.
I believe the risk of disruption is there when you buy expensive companies. When we talk about quality and growth, these parameters should be reflected in numbers. That's what we generally try to incorporate because quality is about return on equity (ROE), free cash flow and return on capital (ROC). There may be some industries or sectors where the free cash flows might be negative for two to three years, but over the longer period, they have reasonable free cash flow, and that reflects in the multiple, too, and that's the basic parameter when we look for the quality of the stock.
You have stocks such as Avenue Supermart, Titan, Trent and Pidilite as the top holdings in the portfolio. They are supposedly expensive. What is your return expectations from these stocks over the next three and five years?
I wouldn't wish to go into individual companies, but as you mentioned, most of the names are in the retail sector as a whole. When we look at India's consumption story, we see FMCG firms, retail companies and other sub-segments and sub-categories such as consumer durables and the auto sector. One observation is that the market exhibits cycles. There are significant concerns regarding the FMCG business as several years have passed, and volume growth remains low. If you want to operate in any industry with a high penetration rate, and when we say penetration, clearly, calculating penetration on 140 crore people would always appear good.
So, when you try to do such assessments, and then when we look at the consumption sector versus retail as a sector, what we realise is the additional element of growth, which retail as a sector provides is the transition from a non-organised to organised; it also provides additional avenue of growth of penetration, geographical penetration.
In some cases, we must always look at various areas of the market and particular segments of the economy on this criterion in order to determine where the relative growth will come from. Definitely one needs to keep in mind that companies in the retail sector have seen failures as well.
What led to underperformance for schemes such as Bluechip, Midcap, and Flexi Cap? What measures are you taking to improve the performance?
We have been on the side of quality and relative growth for most of our funds. That side of the market was geared towards consumption-oriented sectors for almost a decade. While there were few stocks in the mid-cap space in the consumption sector which gave us good returns despite being expensive, there were sectors where relative growth was there; we had lower exposure, but we have made certain changes in the portfolio.
In the last three to four years, we have increased the number of stock holdings in our portfolio. So, if our midcap fund had 40-60 stocks earlier, we have not increased it to 70-90 stocks. So, that process is on, and wherever we think there is relative growth, we have changed our portfolios.
Also read: Interview with R Srinivasan of SBI Mutual Fund
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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