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Interview with Chandresh Nigam of Axis Mutual Fund

Chandresh Nigam, MD & CEO, Axis Mutual Fund discusses the revival in the performance of Axis Long Term Equity Fund, its focus on quality, and the recent crisis in debt funds

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Speaking to Aarati Krishnan, Chandresh Kumar Nigam, MD & CEO, Axis Mutual Fund discusses a variety of topics including the revival in the performance of Axis Long Term Equity Fund, Axis AMC's focus on quality, current market valuations and the recent crisis in debt funds.

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Axis Long Term Equity Fund, which is a popular ELSS fund, had a bad patch two years ago and its performance has since recovered. What led to the turnaround?
We don't look at it as a bad patch because we don't worry too much about short-term or peer-group relative performance. We have followed the same strategy for the fund consistently from inception. Our criteria for stock selection, our risk profile and assessment of high-quality businesses remain the same. Yes, our rankings may change based on what other funds in the category are doing. In 2013, we were the top-performing fund. In 2016, we were probably in the fourth quartile and in 2017 and 2018, we were back in the top.

But in terms of strategy, we remain absolutely dedicated to high-quality growth businesses. That strategy may outperform in some years and underperform in others. But we are focused on it because we believe that quality and growth will deliver over the long term in the Indian markets. We are probably unique in that respect because we do see other AMCs moving to other styles such as value or momentum at times depending on what is working in the market. So, when you say we did badly in 2016, it is only relative performance. It is not as if the companies we own did poorly at that time.

We strongly believe that because we stick to high-quality companies, we run a reasonably low-risk portfolio that may do quite well even if the market corrects.

AMCs in India today offer both value- and growth-style funds because different styles work in different markets. But why has Axis AMC stuck to one style, which is investing in high-quality, high-growth businesses?
I strongly believe that a single investment desk cannot identify both growth and value stocks. These are two investing styles that require very different mindsets. I don't think you can ask the same sector analyst to pick both growth and value stocks. The same goes for the fund manager as well. We have learnt this from Schroders too. If you want to do different styles, you need to run them through separate teams.

Today, our analysts and fund managers function like quasi private-equity investors, looking out for businesses with a long growth runway. I cannot suddenly ask them to switch to identifying beaten-down value stocks. I have seen that if value picks do not see value unlocking in six months or one year, they may never deliver. So, a value investor has to be extremely clued on to the markets and what's happening to the prices.

We at Axis have taken the call that there will be times when our funds will underperform due to style and we have accepted it. If the management's intention is to always have one of the funds in the top quartile, that's when you need different styles. The risk with that is, when you are trying to get one of your funds to be top performers, that often leads to a lot of beta-chasing and risk-taking. We are firmly focused on making returns over a three- to five-year time frame, which is what we believe our investors want.

Axis Midcap Fund has been the only mid-cap with positive returns in the last one year. What has driven this?
I would attribute it to the same quality strategy that we have. But let us look back a bit for the context. Between 2011 and 2013, the mid-cap indices fell some 40 per cent while the large-cap indices were more resilient. That was a period when reasonably good companies also saw stock prices correct sharply. When the 2014 election rally took wing, the one-year returns on mid-cap stocks rebounded very sharply. Thanks to these returns, over 2015 to 2017, mid-cap and multi-cap funds saw a surge in their popularity and net inflows.
Mid caps in India do not have much depth to absorb very high liquidity and this led to a situation where the flows were deployed in the same set of stocks, bidding up their prices and valuations. Mid-cap P/E multiples were at a 40 per cent premium to large caps then.
So, what did we do? We had a high-quality portfolio throughout. We underperformed massively in 2015 and 2016 when the beta rally was underway. Actually our mid-cap fund did give us a lot of pain and stress at that time. But when we evaluated our portfolios, we found that the companies were of the kind we were happy to own for the long term. We stuck to them. That's what has paid off in the last couple of years as the mid-cap space has turned more volatile. I still believe valuations are quite high for mid-cap stocks.

Today there's worry that the Indian market P/E is too high, with the Nifty P/E at 29 times. Do you think investors should be cautious about equity allocations now?
I think one needs to understand what goes into the index P/E. Take individual stocks. Today, the biggest arbitrage available in the market is between investors who take a very short-term view of stocks and those who take a long-term five years plus view. If there's a great growth possibility in a business over four-five years, the P/E can shrink to reasonable levels. We have observed this first-hand. We often buy companies that value investors are selling because the P/E is too high. But if the company delivers growth rates of 20 or 30 per cent over four-five years, that often ends up justifying the starting P/E.

We are the largest shareholders in some of the high-growth businesses in the country, though we are not the largest AMC by a long chalk. So, you should not look at P/E in isolation but need to correlate it to the growth runway and how long it will last.

Two, you need to see the index composition. World over, the markets are narrowing from a fundamental perspective. Fewer companies are managing high growth rates. In India too, that has been true and their weightage in the Nifty is accordingly rising. If you were to make an equal-weighted Nifty with the same stocks that were there 10 years ago, my hunch is that the Nifty P/E may not be as high. Because the Nifty is market-cap weighted, it acquires higher weights in high-growth companies with high valuations over time.

My worry today is not about Nifty P/E but about the high P/Es of mid-cap stocks. There is no clarity on whether some of the high growth mid-cap stocks of today can sustain that growth five years hence. We feel more confident about the large-cap names. So, whenever people asked me in the last couple of months if the index would fall very sharply, I told them that I see limited scope for that because the companies that are driving high index valuations are still delivering growth of 25-30 per cent. We are not fans of taking too many cues from the index P/E without looking at individual companies.

Axis Mutual Fund has many consumer-facing companies across its portfolios. Today there's a lot of worry about the consumption slowdown. So do you see a risk to the earnings of the stocks you own?
We realise that the companies we own cannot deliver high growth rates every quarter. Only bonds can give you that kind of predictability. We do observe a consumption slowdown and that's why we are holding slightly higher levels of cash in the portfolio. We can take a knock for a quarter or so if growth slows for the companies we own.

While we are not worried about consumption being structurally impacted, competition is something we watch out for. Competition can affect pricing power and that is really the guru mantra of our stock selection. But if you ask me if the India consumption story is over, I would certainly disagree. In India if you don't buy consumption, I don't know whether there is an India story left! Having said this, if there is a consumption slowdown, as we saw during demonetisation, yes, we will be impacted. That's why we try to make a distinction between growth businesses where valuations do justify growth prospects and those where they don't make sense. One exercise that we often do is whether we would go out and buy the same stocks if we had new money to deploy. Today the answer is yes.

If the economy is going to go through a really bad patch, our kind of high-quality growth portfolios will definitely weather that phase better than others because there will be a flight to safety.

What has been your approach to debt investing that has helped avoid recent debt-fund mishaps?
I would attribute it all to process and risk management. As a fund house that started out in 2008 in the midst of the global financial crisis, we have been very paranoid about risk management from Day One. We have been quite cautious about taking on credit risk. In India, the market for debt is not very liquid. If things go wrong, you have practically no exit. You need to be conscious of that. So, our priority is quality. We have not featured exposures to any of the troubled bonds as we don't understand the balance sheets of their issuers. We are also very careful about never taking on concentration risk. We see no reason why an FMP portfolio needs to be different from an open-end fund's portfolio. Our approach to debt is simply 'when in doubt, stay out'.

In this respect, our board and sponsor are also on board with our debt strategy. You will often find that our credit fund is not in the first quartile in terms of yield. We are comfortable with making a lower yield at a lower risk in debt. I am not claiming that we have faced no issues in our debt funds. We have faced downgrades, too, but have been able to explain them to the satisfaction of our investors.

But having said this, I think the debt market is also offering phenomenal opportunities today in terms of credit. The spreads for AA paper are far higher than before. It is hard to convince investors to buy credit now, but my sense is that this is a good time have an allocation. Today, investors also understand credit risks much better than they did four-five years ago.

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