Jinesh Gopani is the Head of Equities at Axis Asset Management Company Limited. He has a total experience of 15 years in the capital markets of which six years are in equity fund management. Prior to joining Axis AMC he worked with Birla Sun Life Asset Management Company Ltd.
In this interview Jinesh Gopani talks about the likely impact of SEBI’s proposed schemes consolidation of Mutual funds, about the market and economy in general and also about two prominent funds managed by him – Axis Long term equity fund and Axis Focused 25 fund.
1) What would be the impact of the recent scheme consolidation norms by SEBI on fund’s long term performance, especially the alpha that managers used to generate based on current allocation norms?
We believe that it is too early to say anything on the long performance impact. However, it is good that now all mutual funds and their schemes will have a level playing field to prove their processes, research capabilities and stock picking abilities to generate alpha for their respective investors.
2) What short term impact of performance (next 5 months during which the restructuring happens) do you expect in returns due to portfolio restructuring of schemes after the proposed change by SEBI?
As per our preliminary assessment, we don’t see much impact on large cap funds, however you would see some changes in mid cap side of the schemes. Having said that, we feel that it is too early to do any kind of guess work or comment in that regard.
3) Do you welcome this change? Do you have an opinion that the freedom of fund managers has been restricted by this?
We believe that 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 make informed decisions. We heartily welcome this move by SEBI as it would bring all the fund managers on a level playing field to demonstrate their abilities to manage portfolios.
4) Why was the total return index not used by a majority AMCs till now? What is your opinion about using this measure?
The total return index captures dividends and interest earned from these securities along with the price movement. Current price-based index only captures price movement. It might not make much of a difference in short term performance. However, long term performance can give investors the true picture of their earnings.
5) In your portfolio, pharmaceuticals and drugs sector allocation is changing frequently. Is there any specific reason for it and what is your view on this sector?
Intense pricing pressure in the USA, US regulatory compliance issues and rising R&D investment in complex products have impacted the profitability of Indian generic drug makers. Despite steady growth in India and emerging markets, earnings growth has decelerated over the past two years. Hence, we believe that pharma sector is very stock specific right now. And this is our view as every company has a different set of problems to live with. So we have to be very careful as there are many event risks.
6) You are managing both ELSS and large cap category fund. What different type of stock selection strategy do you follow for stock picking in both category?
At Axis, the broad bias towards quality+growth remains same across our funds. There are a few principles that we normally stick to. These are: strong corporate governance/strong promoter pedigree, secular growth rate of the sector, which is anywhere around 1.5 to 2x of GDP; 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. Beyond the above filter, creating portfolio depends on the fund specific mandate and objective.
Both the funds; Axis Long Term Equity Fund (which is an ELSS scheme) and Axis Focused 25 Fund (which is a compact portfolio of a maximum 25 stocks), as per their structure and positioning, are looked at from 3 years + investment horizon perspective. This gives us a fair amount of cushion to take 3-5 year calls on the stocks that we buy. Axis Long Term Equity Fund has the hard lock-in of 3 years and hence might hold relatively more midcap component than Axis Focused 25 Fund.
7) Recently retail investors are getting attracted to mutual fund investment especially through SIP investments, what positive/negative impact does it create in fund management?
Liquidity is driving the markets, both in the global arena and domestic, but especially domestic, which has been strong after demonetization. Domestic flows are strong with around Rs 5,000 crore of SIP book for mutual funds, which is not heard of quite often. Therefore, when you have so much money per month to invest only in 300 good stories, it will be like the chicken and egg story wherein we debate what comes first – valuation or the timing of your investment. Hence, it is a liquidity-driven market. Having said that, regular SIP inflows also help fund managers in setting the right expectation of fund flows and hence take much informed decision.
8) The portfolio is showing more allocation to banking and financial services sector. What is your view on this sector? What impact will the BASE Rate to MCLR transfer as well as provisioning have on private sector banks, since most of them are big time retail lenders?
In the last decade, the sector allocations in the market indices have changed drastically. In 2003-2007, economy saw huge boom and heavy capex leading to cyclical sectors prospering. While in the last 10 years, consumption related sectors have picked up. The finance sector weight which was around 11% 10 years back, is now around 33%. We are playing the structural growth story linked to low credit outstanding, GDP growth and market share gains for better quality players. We believe that niche NBFCs would be able to take advantage of specific market opportunities.
9) You have always stayed away from the PSUs in general; any specific reason for it?
We have typically avoided the highly cyclical stories and highly regulated sectors.We have also steered away from the stocks which have any type of regulatory problems or the stocks with questionable corporate governance. With PSU banks, the NPA problem is continuing and that is affecting the overall earnings growth.
10) Do you think that too many new policy initiatives (like demonitasation, implementation of GST etc.) in a short time frame is causing economic suffocation?
We believe that corrections are a part and parcel of any healthy bull market and we should not over interpret the recent market movement which has come after a massive nine month rally since the demonetization lows. (29% peak to trough from 26th Dec ’16 to 19th September ‘17). Markets have had a one-way run with low volatility since then. Valuations have been high for some time given lower earnings growth due to two back-to-back blows (demonetisation and GST). We feel that earnings growth should take one to two quarters to come back. Having said that, we continue to believe that the economy has the advantage of a solid macro foundation, which combined with structural reforms will push growth higher in the medium term. However, transition times are always tricky to estimate, and thus it’s easier to have conviction on the 2-3 year scenario than a 2-3 quarter.