New data questions our notions on large and midcaps


For years, we have positioned mid and small caps as "catch them young before they become tomorrow's large caps". Axis MF's research suggests that the migration across cap sizes is more the exception rather than the rule, which reinforces their conviction in differentiating between good vs bad rather than big vs small.

For years, we have positioned large caps as a relatively lower volatility exposure to equity markets, and therefore suitable as core allocations as well as introductory allocations to new investors. Axis MF's data suggests that a multi-cap strategy not only produces better returns, but also displays more or less the same volatility as large caps - which calls into question what we should really be positioning as core: large caps or multicaps.

Read on as Karan takes us through Axis MF's new MultiCap offering and how it plans to seek out businesses at inflection points.


                      Karan Datta                                              Click here to view NFO Presentation of

                   CBO, Axis AMC                                                               Axis Multicap Fund

WF: Would you say this NFO completes your product suite in the equity space?

Karan: From a regulatory perspective, SEBI's decision on rationalization of schemes and defining precise categories of funds will bring in uniformity in the mutual fund industry while preventing duplication of funds of similar nature and help investors in taking informed decision.

Having said that, this move also opens up more opportunities for new products for the fund houses with fewer schemes and Axis MF is one of the biggest beneficiaries in this regard from equity as well as fixed income side.

WF: Your data on returns and risk across large caps, midcaps and multicaps is very interesting - it challenges the notion that large caps should be the default allocation for first time equity investors, since multicaps have demonstrated better upside and equal downside protection. Is it time for us to advocate multicaps as the default allocation?


Karan: Different categories of funds perform differently in different times. Each category will have its own cycle of ups and downs and they may not coincide. When the markets correct, small caps crumble and midcaps struggle but large caps prove to be more resilient. The orderis reversed in the rising market conditions.

Regardless of the company's size, all stock investments carry the risk of investment loss, and it is critical to closely monitor the investments since business conditions can change unpredictably. Axis equity investment philosophy is biased towards quality and growth. The focus is on looking for high conviction ideas that have the potential of generating sustainable growth in the medium to long term.

From an investor's perspective, being consistently good rather than occasionally great has the potential to create long term wealth. We believe that this fund is suitable for all classes of investors to help them participate in wealth creation and compounding potential of equity over the long term.For most ordinary investors who are seeking diversification with simplicity, multi-cap can be a good option to form the core allocation.

WF: Your point about large vs small being less relevant than good vs bad is very apt indeed. Does this call into question the basic investment argument that our industry has put forth all along for mid and small caps - "catch them early as they scale up into big companies"?


Karan: Our study on probability of climbing the market cap ladder shows that the linear extrapolation of stocks from mid or small caps to larger-caps is more an exception rather than a rule. There is high level of attrition in the names that are being categorized within market cap buckets from time to time. Many companies get benefitted when overall markets are rising. However, in tough times, only a few companies can sustain their position in the market and keep generating returns for their investors.

Appreciating this, at Axis, we have always looked for a three to five year view in any of the companies, taking high conviction bets, carrying out thorough in-house extensive research and trying to find out companies that are leaders in the large cap space and leaders or probable leaders in mid and small caps. Irrespective of size of the company, bias towards quality with sustainable growth prospects doesn't change for us.

Overall investment thesis behind this research includes looking for companies with strong corporate governance, secular growth rate of the sector, a company with a reasonably strong business model, which demonstrates its pricing power in the product category and the business it is in, and ultimately good ROEs and cash flows.

WF: Your fund aims to capture opportunities in companies that are at inflection point. Given the rather poor results your data showcases of most companies not being able to scale up to the next level, how do you propose to pick these inflection point stocks? Can you walk us through some examples you see currently of sectors or stocks at inflection point?

Karan: Axis Multicap Fund distinguishes itself by aiming to identify companies that are at their inflection points - in the midst of circumstances that have the potential to substantially improve the growth trajectory of the company. This can happen for various reasons like:

  1. Market Share Gain due to Competitive Advantage

  2. Industry Consolidation

  3. Sunrise Industry

  4. Improved management focus & Capital Allocation

  5. Regulatory & Policy Changes

Although some of the stories are more stock specific, from an industry/sector perspective, one of the prominent illustrationsis seen in the private sector banks where the growth has been faster with retail loan book growing at steady and consistent rate as compared to PSU's and subsequently the gain in market share.

Other such example is of the multiplex industry where the screens got consolidated in the hands of organized players and now only the top 4 to 5 players account for ~65-70% of multiplex screen share. These players have seen increased valuations with consolidation.

Some of the beneficiaries of regulatory and policy changes are Chemical industry with imposition of Anti-Dumping duty by India going up significantly in the last couple of years while China focusing on curbing pollution; and OMCs (Oil Marketing Companies) with fuel price deregulation, now own ~92% of India's fuel retail outlets.

Further, innovations in technology, artificial intelligence (AI), analytics, e-commerce are good examples for sunrise industries.

WF: Your presentation makes the point about a sustained resurgence in economic growth being dependent on recovery in the capex cycle. However, with capacity utilizations continuing to remain low and little visibility of capex plans from leading players, what gives you the comfort that we will see a surge in capex soon enough to sustain economic recovery?

Karan: While India's private capex cycle has been weak in recent years, constrained by a challenging macro environment, we expect it to pick up in the next few quarters, driven by recovery in end-demand, improvement in corporate balance sheets, and the positive momentum provided by strong public capex and FDI flows. Over the medium term, we expect the share of investment to GDP to rise, supportedby a cycle of favourable demographics and rising income and savings rates. The governmentspending mix has also changed favorably towardsinvestments.Housing sector has certain extent of potential to drive capex as social housing boom is expected to end the property slowdown with improved affordability levels. Ultimately, all said and done, it is the strength of the capex cycle that will determine how strong and sustained the growth cycle will be.

WF: Why do you believe this is a good time to invest in a multicap fund?

Karan: Over the last couple of years, we have seen the change in valuation gap between Large Cap and Midcap Segments. Large caps, usually traded at premium, are now trading at discount as compared to midcaps. Better companies are getting better valuations in the market. Depressed earnings are artificially boosting the PE multiple for the entire Midcap index. Although valuations look a bit rich standalone, but are reasonable if adjusted for the cycle.

Multicaps offer agility to shift over market caps/sectors/themes considering valuation.


Disclaimer: Past performance may or may not be sustained in the future.

Statutory Details: Axis Mutual Fund has been established as a Trust under the Indian Trusts Act, 1882, sponsored by Axis Bank Ltd. (liability restricted to Rs. 1 Lakh). Trustee: Axis Mutual Fund Trustee Ltd. Investment Manager: Axis Asset Management Co. Ltd. (the AMC) Risk Factors: Axis Bank Limited is not liable or responsible for any loss or shortfall resulting from the operation of the scheme.

This document represents the views of Axis Asset Management Co. Ltd. and must not be taken as the basis for an investment decision. Neither Axis Mutual Fund, Axis Mutual Fund Trustee Limited nor Axis Asset Management Company Limited, its Directors or associates shall be liable for any damages including lost revenue or lost profits that may arise from the use of the information contained herein. No representation or warranty is made as to the accuracy, completeness or fairness of the information and opinions contained herein. The AMC reserves the right to make modifications and alterations to this statement as may be required from time to time.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

Data updated as on September 29th, 2017

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