Mutual Funds

Identifying High Conviction Small-cap Stocks

Oct 06, 2022





Listen to Axis Small Cap Fund: Identifying High Conviction Small-cap Stocks




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Certain mutual funds categories, such as Small Cap Funds, carry high risk. But when you choose the right scheme, it can prove to be extremely rewarding. Notably, most of the exponential wealth-creation stories are from the midcap and small-cap segments.

Interim market corrections offer you the opportunity to invest in such high-risk mutual funds that may reward you handsomely over the long run.

Axis Small Cap Fund is a Small Cap Fund that has clearly stood out in terms of performance, particularly during bearish market phases, and has generated superior risk-adjusted returns for its investors in the long run.

Graph 1: Growth of Rs 10,000 if invested in Axis Small Cap Fund 5 years ago


Axis Small Cap Fund aims to invest in high growth-oriented quality stocks available at attractive valuations and hold it with a long-term view until the full potential is derived. The fund stood among the top performers in the Small-cap Fund category during the market crash of 2020. However, it lagged many of its peers and the benchmark in the ensuing bull phase. Nonetheless, the fund showed resilience once the market started witnessing sharp volatility from October 2021 onwards. Given its ability to contain the downside risk during bearish market phases, Axis Small Cap Fund has been able to establish itself in the small-cap space. The fund’s focus on high-quality growth stocks and the superior stock-picking ability of the fund management team has driven its performance. Over the last 5-year period, Axis Small Cap Fund has generated returns at a CAGR of 21.3%, thereby clearly outperforming the benchmark Nifty Smallcap 250 – TRI by a margin of about 12 percentage points. An investment of Rs 10,000 in Axis Small Cap Fund 5 years back would have now appreciated to Rs 26,110 compared to a valuation of Rs 15,612 in its benchmark.

Graph 1
Past performance is not an indicator of future returns

Data as on October 04, 2022

(Source: ACE MF)

 

Table: Axis Small Cap Fund’s performance vis-á-vis category peers




Returns are point to point and in %, calculated using the Direct Plan-Growth option. Those depicted over 1-Yr are compounded annualised.

Data as on October 04, 2022

(Source: ACE MF)

*Please note, this table only represents the best-performing funds based solely on past returns and is NOT a recommendation. Mutual Fund investments are subject to market risks. Read all scheme-related documents carefully. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.

 

Axis Small Cap Fund has scripted a superior track record of generating substantial alpha for its investors with a spectacular performance in the last few years. The fund has outperformed its benchmark and category peers with a noticeable margin and has found a place among the top performers in the Small-cap Fund category over long-term time frames. Even though Axis Small Cap Fund has often trailed its benchmark and many of its peers during bull phases, the fund clearly stands out during bearish market phases, thus rewarding investors well over a complete market cycle

Despite holding a high-risk investment mandate, Axis Small Cap Fund has registered far lower volatility (standard deviation) when compared to its benchmark and most of its peers. The cautious investment approach followed at the fund house has helped Axis Small Cap Fund deliver superior risk-adjusted returns for its investors. Its Sharpe ratio is commendable and is currently much higher compared to the benchmark and many of its peers.

Axis Small Cap Fund: Identifying High Conviction Small-cap Stocks

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Investment strategy of Axis Small Cap Fund

Axis Small Cap Fund is mandated to invest a minimum of 65% of its assets in equity & equity-related instruments of small-cap companies, i.e. companies ranking 251st onwards, on a full market capitalisation basis. It can also invest up to 35% of its assets in equity and equity-related instruments of non-small cap companies, as well as debt & money market instruments.

Small-cap companies, as they are in a stage of growth, may not be valued at their fair price. However, the fund intends to identify strong growth companies and take advantage of their future appreciation. The fund house employs a “Fair value” based research process to analyse the appreciation potential of each stock in its universe (fair value is a measure of the intrinsic worth of a company). The universe of stocks is carefully selected to include companies having robust business models and enjoying sustainable competitive advantages compared to their competitors.

While building the portfolio, the fund management follows the bottom-up approach to investing, focusing on the appreciation potential of individual stocks from a fundamental perspective. It seeks to identify long-term businesses keeping in mind risk and reward by containing mistakes and navigating volatile stock movements. The fund house believes that the key to successful investing in small-caps is patience and the ability to withstand short-term volatility. Axis Small Cap Fund utilises a holistic risk management strategy in order to manage risks associated with investing in equity markets.

Graph 2: Top portfolio holdings in Axis Small Cap Fund





Graph 2 Graph 2


Holding in (%) as of August 31, 2022

(Source: ACE MF)

 

As of August 31, 2022, the fund held 74 stocks in its portfolio, with top holdings in names such as Fine Organic Industries, Galaxy Surfactants, Narayana Hrudayalaya, Brigade Enterprises, and Birlasoft. The top 10 stocks in the portfolio together accounted for around 35.1% of its assets. Following a buy-and-hold approach, the fund has a low turnover ratio of around 15-20%, which highlights the fund manager’s conviction in each of its holdings.

Axis Small Cap Fund has benefited the most from its exposure in Tata Elxsi, Brigade Enterprises, Grindwell Norton, RHI Magnesita India, and Narayana Hrudayalaya, which turned out to be the major contributors to its performance in the last one year.

Chemicals dominate Axis Small Cap Fund’s portfolio with an allocation of close to 16%. The fund also holds significant exposure in Infotech, Construction, Engineering, Healthcare Services, Auto Ancillaries, Finance, Consumption, and Cement, among others. Overall, the fund’s portfolio appears well-positioned to sail through market volatility going ahead.

Suitability

Axis Small Cap Fund has proven its ability to generate superior returns even in conditions where most of its peers found it challenging to limit the downside. The fund has been agile enough to take advantage of various investment opportunities present in the small-cap space as well as a mid-cap segment. It aims to invest in high growth-oriented quality stocks available at attractive valuations and hold it with a long-term view until the full potential is derived.

Despite being a growth-oriented small-cap fund of aggressive nature, Axis Small Cap Fund does not resort to taking aggressive calls or momentum bets and focuses on quality. Even if the performance of the fund has not been very attractive during upside market rallies, it has proven the ability to limit downside risk during extreme conditions, which results in superior returns over complete market cycles.

The aggressive investment mandate, along with higher allocation to mid and small-caps, make Axis Small Cap Fund suitable for investors with a very high-risk appetite and a long-term investment horizon of at least 7-10 years.

 

Warm Regards,

Divya Grover

Research Analyst

 

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Note: This write up is for information purpose and does not constitute any kind of investment advice or a recommendation to Buy / Hold / Sell a fund. Returns mentioned herein are in no way a guarantee or promise of future returns. As an investor, you need to pick the right fund to meet your financial goals. If you are not sure about your risk appetite, do consult your investment consultant/advisor. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.

 

DISCLOSURE AS PER SECURITIES AND EXCHANGE BOARD OF INDIA (RESEARCH ANALYSTS) REGULATIONS, 2014

About the Company including business activity

Quantum Information Services Private Limited (QIS) was incorporated on December 19, 1989.

QIS was promoted by Mr Ajit Dayal with an objective of providing value-based information/views on news related to equity markets, the economy in general, sector analysis, budget review and various personal products and investments options available to the Public. It was the first company to start equity research on an institutional level.

‘PersonalFN’ is a service brand of QIS and was started in the year 1999. In 1999, the Company registered the Domain name www.personalfn.com for providing information on mutual funds and personal financial planning, financial markets in general, etc. and services related to financial planning and research in various financial instruments including mutual funds, insurance and fixed income products to customers. It offers asset allocation and researched investment recommendations through its financial planning services.

Quantum Information Services Private Limited (QIS) is registered as Investment Adviser under SEBI (Investment Adviser) Regulations, 2013 and having Registration No.: INA000000680. In terms of the second proviso to Regulation 3 (1) of SEBI (Research Analysts) Regulations, 2014 the Company is not required to obtain Certificate of registration from SEBI.

Disciplinary history

There are no outstanding litigations against the Company, its subsidiaries and its Directors.

Terms and condition on which its offer research report

For the terms and condition for research report click here.

Details of associates

  1. Money Simplified Services Private Limited;

  2. PersonalFN Insurance Services India Private Limited;

  3. Equitymaster Agora Research Private Limited;

  4. Common Sense Living Private Limited;

  5. Quantum Advisors Private Limited;

  6. Quantum Asset Management Company Private Limited;

  7. HelpYourNGO.com India Private Limited;

  8. HelpYourNGO Foundation;

  9. Natural Streets for Performing Arts Foundation;

  10. Primary Real Estate Advisors Private Limited;

  11. HYNGO India Private Limited;

  12. Suresh Lulla;

  13. I V Subramaniam.

Disclosure with regard to ownership and material conflicts of interest

  1. ‘subject company’ is a scheme on which a buy/sell/hold view or target price is given/changed in this Research Report;

  2. Neither QIS, it’s Associates, Research Analyst or his/her relative have any financial interest in the subject Company;

  3. Neither QIS, it’s Associates, Research Analyst or his/her relative have actual/beneficial ownership of one per cent or more securities of the subject Company, at the end of the month immediately preceding the date of publication of the research report;

  4. Neither QIS, it’s Associates, Research Analyst or his/her relative has any other material conflict of interest at the time of publication of the research report except that QIS (PersonalFN) is, as per SEBI (Mutual Funds) Regulations 1996, an associate / group Company of Quantum Asset Management Company Private Limited and Trustees and Sponsor of Quantum Mutual Fund (QMF) and to that extent there may be conflict of interest while recommending any schemes of QMF. However, any such recommendation or reference made is based on the standard evaluation and selection process, which applies uniformly for all Mutual Fund Schemes. The payment of commission (upfront / annualized & trail), if any, for any Schemes by QMF to QIS (PersonalFN) is also at arm’s length and as per prevailing market practices.

Disclosure with regard to receipt of Compensation
 

  1. Neither QIS nor it’s Associates have received any compensation from the subject Company in the past twelve months;

  2. Neither QIS nor it’s Associates have managed or co-managed public offering of securities for the subject Company;

  3. Neither QIS nor it’s Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject Company;

  4. Neither QIS nor it’s Associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months.

  5. Neither QIS nor it’s Associates have received any compensation or other benefits from the subject Company or third party in connection with the research report

General disclosure

  1. The Research Analyst has not served as an officer, director or employee of the subject Company.

  2. QIS or the Research Analyst has not been engaged in market making activity for the subject Company.

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Subject Company means Mutual Fund Schemes

Quantum Information Services Private Limited CIN: U65990MH1989PTC054667 Regd. & Corp. Office: 103, Regent Chambers, 1st Floor, Nariman Point, Mumbai – 400 021

Email:info@personalfn.com Website: www.personalfn.com Tel.: 022 61361200 Fax.: 022 61361222 SEBI-registered Investment Adviser. Registration No. INA000000680, SEBI (Investment Advisers) Regulation, 2013


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