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Fund Analysis: Axis Midcap: Well begun
Mon, Oct 15, 2012
Source : Shoaib Zaman, Citrus Interactive

Axis Mid-Cap is a new fund in the mid-cap space whose mandate is to invest in high-growth mid-sized companies. The fund was started in February 2011. Currently it has Rs 106.26 crore under management. According to its style sheet, Axis Mid-Cap is a mid-cap blend fund.

Investment strategy

The fund aims to invest in larger mid-cap companies as, in the words of its scheme information document, "they combine the flexible, innovative, high-growth features of mid- and small-size companies with the proven management and liquidity of larger companies".

The fund's mandate is to invest 80-100 per cent of the fund's portfolio in mid-cap stocks as defined by the fund house. The fund can invest both in stocks that belong to the BSE Mid-cap Index and also in companies of similar size that are not part of the index. Within the mid-cap portion of the portfolio, the fund manager has to invest 75-100 per cent in larger mid-cap companies and 0-25 per cent in smaller mid-cap companies.

The fund can invest only 0-20 per cent in stocks that are non-mid cap in nature. And it can invest only up to 20 per cent in debt and money market instruments for tactical reasons.

Regarding stock selection, the fund's scheme information document states: "The portfolio will be built utilising a bottom-up stock selection process, focusing on appreciation potential of individual stocks from a fundamental perspective."

Fund performance

Scheme Name

3 Months

6 Months

1 Year

Axis Midcap Fund(G)

13.74

13.31

21.65

BSE MIDCAP

7.37

4.11

7.82

Category Average

8.77

7.78

13.67

28-Sep-2012, performance in %

 

Year-to-date (September 28) the fund has given a return of 35.29 per cent. It is currently ahead of its benchmark, the BSE Midcap Index. Since inception the fund has given a compounded annual return of 13.11 per cent.

Since it is a newly-launched fund, there is not much of a track record for one to examine.

Portfolio characteristics

Number of equity holdings. Currently this fund has 23 stocks in its portfolio. This is much lower than the median for the diversified equity category, which currently stands at 40.5.

Its average number of holdings since inception (last one-and-a half years) has been 41.  

Sector concentration. The fund's concentration in the top three, five, and 10 sectors in its portfolio is two-to-three percentage points lower than the median for the diversified equity category.

Company concentration. The fund's concentration in the top three, five, and 10 stocks in its portfolio is higher than the median for the diversified-equity category.

Thus, based on the number of equity holdings and company concentration, one can conclude that the fund currently runs a concentrated portfolio. But the fund tries to diversify its bet across sectors.

Turnover ratio. According to the fund's latest disclosure, it had a turnover ratio of 35 per cent in August. This was half of the median for the diversified-equity category, which currently stands at 72 per cent.

Since February 2012 (the period since when continuous data is available) the fund's average turnover ratio till August 2012 has been around 51 per cent.

Thus, the fund manager does not churn his portfolio too much, which we think is a positive.

Expense ratio. Currently the fund has an expense ratio of 2.45 per cent. This is 10 basis points higher than the median of 2.35 per cent for the diversified-equity category.

Cash calls. Since its launch, the fund's average cash allocation has been 16.81 per cent. In its first year of launch from February 2011 to January 2012, the fund's cash level was in double digits, ranging from 15-20 per cent most of the time. However, since February 2012 the fund's cash allocation has varied from 2-9 per cent.

High allocation to cash can reduce a fund's decline in a falling market, but at the same time there is the danger that it could be left on the sidelines when the markets move up suddenly.

Scheme Name

Beta

Standard Deviation

Axis Midcap Fund(G)

0.56

0.84

Category

0.78

0.98

 

Risk. On risk measures such as beta and standard deviation, the fund's figures are lower than the category average. 

Scheme Name

Sharpe

Treynor

Axis Midcap Fund(G)

0.10

0.15

Category average

0.06

0.08

 

Risk-adjusted returns. On measures of risk adjusted returns, such as Treynor ratio and Sharpe ratio, the fund fares better than the median for the diversified-equity category.

Portfolio strategy

2011

In 2011 the markets declined: the Sensex fell -24.83 per cent, the BSE Mid-cap Index fell -34.78 per cent, and the BSE Small-cap Index fell -43.63 per cent. The fund was started in February of 2011 and it was only by June 2012 that it was able to deploy most of its assets. Between June 2011 and January 2012, the fund maintained a high level of cash: most of the time it ranged from 15-20 per cent.

During 2011, the fund's average exposure to large-cap companies was nearly 38 per cent, and to mid-cap companies, about 40 per cent. Since the market was declining in 2011, the rest of the assets were in cash.  

In 2011 only the BSE FMCG Index turned in a positive performance (9.27 per cent). All the other sectors gave negative returns: BSE Healthcare (-13.20 per cent), BSE IT (-15.62 per cent), BSE Teck (-16.52 per cent), BSE Consumer Durables (-18.13 per cent) and BSE Auto (-20.30 per cent).

Fund's shift in sectoral allocation during 2011

Industry

Jun 2011 (%)

Dec 2011 (%)

Raised/lowered exposure (%age pts.)

Energy

10.84

15.20

4.36

Consumer Goods

6.52

10.64

4.12

Pharma

4.53

6.31

1.77

IT

3.10

1.43

-1.67

Textiles

1.86

 

-1.86

Industrial Manufacturing

4.37

 

-4.37

 

While the fund was started in February of 2011, we have taken June as the starting point for the above table, since it was by June that allocation to cash had been reduced to the limit prescribed by the fund’s mandate. During this period, the fund increased its exposure to energy, consumer goods and pharma. It completely exited sectors like industrial manufacturing and textiles while reducing exposure to IT.

Sector allocation: Fund versus benchmark 

Sector

Fund (%)

BSE Mid-cap (%)

Over/under weight vis-à-vis index (%age pts.)

Industrial Gases & Fuels

15.20

0.92

14.28

Household & Personal Products

5.57

2.41

3.16

Finance - Housing

3.46

0.61

2.85

Auto Ancillary

4.74

2.17

2.57

Automobiles-Trucks/Lcv

3.47

1.42

2.05

Tyres & Allied

3.05

1.59

1.46

Consumer Food

3.37

2.13

1.24

Bank – Private

5.65

6.11

-0.46

Pharmaceuticals & Drugs

6.31

7.14

-0.83

Bank – Public

2.45

5.75

-3.30

As in Dec 2011

 

By 2011, the fund was overweight compared to its index on sectors such as industrial gases and fuels, household and personal products, housing finance, auto ancillary and automobiles. It was decisively underweight on public sector banks, and marginally underweight on pharma and private banks. (See table above)

Stock allocation: Fund versus index

Company

Fund (%)

BSE Mid-cap (%)

Over/under weight vis-à-vis index (%age pts.)

Indraprastha Gas Ltd.

8.08

0.45

7.63

Petronet LNG Ltd.

4.02

 

4.02

IndusInd Bank Ltd.

3.40

 

3.40

Dewan Housing Finance Corpn. Ltd.

3.46

0.28

3.18

Amara Raja Batteries Ltd.

3.57

0.46

3.11

Eicher Motors Ltd.

3.47

0.63

2.84

Gujarat Gas Company Ltd.

3.10

0.33

2.77

Apollo Tyres Ltd.

3.05

0.60

2.45

Navneet Publications (India) Ltd.

2.30

 

2.30

ING Vysya Bank Ltd.

2.25

0.98

1.27

As in Dec 2011

 

Among stocks, in December 2011 the fund was heavily overweight on Indraprashta Gas. It also had large positions in Dewan Housing Finance, Amara Raja Batteries, Eicher Motors, and so on. Some of the stocks outside the index to which the fund had large allocations were Petronet LNG and IndusInd Bank (See table above).

 

2012

Year-to-date (September 30, 2012) the Sensex is up 21.40 per cent, the BSE Mid-cap Index is up 28.67 per cent and the BSE Small-cap Index is up 26.44 per cent. So far this year (September 30, 2012) the fund is up 35.29 per cent, seven percentage points ahead of its benchmark.

In 2012, the fund increased its average allocation to large-cap stocks to 40 per cent. Meanwhile, its allocation to mid-cap stocks went in the range of 50 per cent. Exposure to small-cap stocks was a miniscule 1.12 per cent. In September 2012 there was a decisive increase in the fund's allocation to mid-cap companies—to 54 per cent.  

The fund began the year with a high cash allocation of 15.15 per cent in January 2012, which fell to 2.45 per cent by September (in a rising market). So far this year the fund has had an average allocation of 5.76 per cent to cash.

Year-to-date (September 30, 2012) the top-performing sector indexes have been BSE Bankex (43.54 per cent), FMCG (36.48 per cent), BSE Capital Goods (35.82 per cent), BSE Realty (34.26 per cent), BSE Consumer Durables (31.33 per cent), BSE Health Care (28.24 per cent) and BSE Auto (27.87 per cent).

Shift in fund's sectoral allocation during 2012

Sectors

Jan 2012 (%)

Sep 2012 (%)

Raised/lowered exposure (%age pts.)

Financial Services

17.68

25.15

7.47

IT

1.50

5.62

4.12

Automobile

12.40

15.77

3.37

Media & Entertainment

1.72

 

-1.72

Others

23.70

17.14

-6.56

Energy

14.06

3.21

-10.85

 

This year the fund has increased its allocation to financial services, IT and automobile. It has trimmed its allocation to the energy sector and ‘others’ in a big way (see table above).

Stocks/cash

Jan 2012 (%)

Sept 2012 (%)

Raised/lowered exposure (%age pts.)

United Spirits Ltd.

 

4.25

4.25

Persistent Systems Ltd.

1.91

4.98

3.07

Allahabad Bank

1.87

4.8

2.93

Petronet LNG Ltd.

3.9

 

-3.9

Indraprastha Gas Ltd.

7.05

2.31

-4.74

Cash & Cash Equivalent

15.15

2.45

-12.7

Among stocks, the fund has decreased its allocation to Indraprastha Gas and Petronet LNG. Allocation to Allahabad Bank and Persistent Systems has been increased. The fund manager has also chosen to make fresh investments in United Spirits, which seems like a contrarian bet, considering the negative media coverage around the company’s owner, Vijay Mallya (see table above).

Fund vis-à-vis index, sector wise

Sector name

Fund (%)

Mid-cap (%)

Over/under weight vis-à-vis index (%age pts.)

Automobiles-Trucks/Lcv

5.61

1.42

4.19

Breweries & Distilleries

4.25

0.24

4.01

Auto Ancillary

5.88

2.17

3.71

Bank – Public

9.30

5.75

3.55

Consumer Food

5.59

2.13

3.46

Tyres & Allied

4.27

1.59

2.68

IT - Software

6.53

4.69

1.84

Bank – Private

7.33

6.11

1.22

Finance – NBFC

4.07

4.03

0.04

Pharmaceuticals & Drugs

6.84

7.14

-0.30

As in Sep 2012

 

By September 2012, the fund was decisively overweight vis-a-vis its index on sectors such as Automobiles-Trucks/LCV, Breweries & Distilleries, Auto Ancillary, Public Banks, and so on. Among its top 10 holdings, it was underweight on pharmaceuticals and drugs. (See table above)

Fund vis-à-vis index, company wise

Company

Fund (%)

BSE Mid-cap (%)

Over/under weight vis-à-vis index (%age pts.)

Persistent Systems Ltd.

4.98

 

4.98

United Spirits Ltd.

4.25

 

4.25

Allahabad Bank

4.80

0.70

4.10

Amara Raja Batteries Ltd.

4.26

0.46

3.80

ING Vysya Bank Ltd.

4.74

0.98

3.76

Apollo Tyres Ltd.

4.27

0.60

3.67

CMC Ltd.

4.06

0.43

3.63

Eicher Motors Ltd.

3.72

0.63

3.09

Sadbhav Engineering Ltd.

3.37

0.30

3.07

Agro Tech Foods Ltd.

2.85

 

2.85

As in Sept 2012

 

By September 2012, the fund was overweight vis-a-vis its index on stocks like Allahabad Bank, Amara Raja and others. The fund’s top two holdings, Persistent Systems and United Spirits, are not part of the index (see table above).

Fund Manager

The fund has two fund managers. Pankaj Murarka has over 12 years of experience in the equity markets. He has been with Axis Asset Management Company since November 2009. The second fund manager in this scheme is Jinesh Gopani who joined the AMC in October 2009 as an Assistant Fund Manager. Gopani brings over 10 years of experience to the fund.

Conclusion

The fund’s decision to focus on larger mid-caps is prudent, and should go some way towards limiting the risks (volatility, liquidity, etc.) associated with mid- and small-cap category funds. The fund has so far done well in the short duration of its existence. Conservative investors should, as a precautionary measure, wait for the fund to attain a track record of at least three years. If the fund’s good run lasts till then, they may go ahead and invest in it.

 
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