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Why are Axis Mutual Fund's Equity Schemes Overperforming? An ETMONEY Factfinder Report - YouTube
Channel: ET Money
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a few weeks back we had presented a
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video examining the reasons
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for the underperformance of the equity
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schemes of htfc mutual fund
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we went in depth to understand why that
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was the case
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which stocks were underperforming and of
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course the investing style of the fund
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management team
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if you haven't seen that video yet i'll
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be sure to attach a link in the
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description below
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now that was under performance and it's
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only fair that we go to the other end
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and do an in-depth report on a fund
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house that has been showing many
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years of overperformance hi everyone my
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name is shankarnath and in this video
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we shall seek to discover the secret
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sauce that makes the equity schemes of
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access mutual fund one of the best
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performing ones
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for the last many years let's get
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started
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for the purpose of this study we shall
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examine the workings of the access
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long-term equity fund this fund manages
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over
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22 000 crores of investor money and is
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not only the largest scheme for access
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mutual fund
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but is the largest fund in the elss or
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tax saving category
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the access long-term equity fund is a
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very successful fund
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it has been around for more than 10
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years and has delivered over 18 percent
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annual returns
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since inception remarkably the fund's
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performance has been high
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and consistent and has been ranked
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within the top three performers
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in the elss category in six of the last
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11 years
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to put that into perspective if you had
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invested 10
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000 rupees on first of january 2010
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in the access long-term equity fund your
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corpus
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at the end of october 2020 would have
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been 53
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300 rupees the next best performing fund
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over this
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entire period is the invesco india tax
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plan
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which would have delivered a lot lower
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returns with an accumulation of just
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38 300 rupees that's a difference of 3.5
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percent of returns
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every year for over 10 years which is
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quite a bit
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ok now that we are suitably impressed
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with the performance of the access long
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term equity fund
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let's turn our attention to why that is
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the case our research team has
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identified
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five extremely visible strategies that
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the access mutual fund team employs to
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deliver superior performance
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each of these five strategies support
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the growth style of investing
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that access prefers to employ and is
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something that
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everyday investors like you and me can
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use when managing our own portfolios
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so let's dive in with the first of the
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five strategies
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[Music]
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most schemes of access mutual fund
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almost never
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have any public sector enterprises this
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might be on account of corporate
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governance issues with these companies
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or their non-compliance with sebi
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regulations or the mere
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allocation or misallocation of
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shareholder capital
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towards more social projects rather than
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building shareholder value
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the flip side of this stance is that the
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access long-term equity fund
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misses out on many commodity place in
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the mining
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oil gas metal and refining sector as
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most companies in that space have heavy
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government shareholding
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nevertheless this strategy has played
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out really well for the fund house
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over the last few years and stresses the
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importance of setting up boundaries
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within which
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you're most comfortable investing
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[Music]
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more often than not if a business is
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growing in the right direction
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the stock price complements that growth
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and response positively
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now the question is what growth are we
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referring to there are three primary
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growth metrics that our research has
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identified
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first growth in revenue which explains
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if the company is progressing
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and capturing greater market share the
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second one is growth in ebitda or
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operating profits
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which explains if the revenue or sales
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of the company are meaningful
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and are converting into earnings from
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operations and the third growth metric
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is growth in earnings per share or eps
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which indicates if there is progress in
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the amount of profit
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that is being earned for every unit of
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ownership
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so revenue operating profits and
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earnings per share
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these are our growth metrics
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in fact there's a loosely defined word
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called compounders which is used to
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describe such types of companies
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that exhibit consistent and steady
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growth which happens on account of
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high quality operations recurring
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revenue and strong franchise
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and that being said let's map out these
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three growth metrics in the case of
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companies
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in the access long-term equity fund
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portfolio what we have here
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is the five-year annualized growth rate
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on the basis of revenue ebitda
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and the earnings per share for each of
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the companies
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if we take 10 growth as the benchmark we
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see that anywhere from
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17 to 19 companies are satisfying this
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criteria
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out of the 29 companies listed here this
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means about 65 percent of the portfolio
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companies are compounders
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which is much higher than the current 40
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companies
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who fit the same criteria in the nifty
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100 index
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this is a clear indicator that this fund
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management team
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finds better warmth in companies that
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grow their revenue
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profits and profits per share a lot like
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the companies we've been discussing the
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et money youtube channel
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also has a set of compounders and these
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are our viewers
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our subscribers and our commenters so if
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you haven't subscribed to our youtube
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channel or haven't commented to this
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video
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kindly do so as will certainly help us
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with the youtube algorithm
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the price earning ratio or the pe ratio
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is one of the most commonly used
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valuation tools
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by everyday investors simply speaking
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the p e ratio
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explains how much you need to pay for
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one rupee of profit
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which means higher the p ratio more
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expensive or if you choose to look at it
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differently more valuable
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is that business to you in another video
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we had done
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an in-depth study on the pe ratio and
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suggested multiple strategies an
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investor can use
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to improve portfolio returns and manage
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risk i'll be sure to attach the link
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to that video in the description below
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our research shows that the access
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long-term equity fund
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does not shy away from picking up
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businesses which are available at a high
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p
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ratio i mean look at this data
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barring three companies all remaining 26
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companies have a p e ratio
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of 20 and above in fact out of 26
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companies
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nine companies have a p e ratio of over
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50
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and one of these companies avenue super
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mart's
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commands a pe of 116
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this means you have to currently pay 116
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rupees
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for one rupee of profit that's a lot
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but is it let's understand this with
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something i picked up from a manish
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babari talk
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where he spoke about the pe of 1.
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the pe of 1 is a simple mathematical
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basis of
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understanding by when will the company's
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earnings per share
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match up to the price you pay per share
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let me explain this
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now avenue supermart has been growing
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its earnings per share
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at 40 per annum over the last five years
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we picked up this data from the table
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featured in the compounders section
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now let's assume that this company is
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sorted
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and can grow at 40 for some more time so
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if we start with one rupee of profits in
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year 0
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by the end of year 1 the profit will
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grow by 40 percent
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to 1 rupee 40 peso then at the end of
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year
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2 the profit will jump to 1 rupee 96
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pese
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then 2 rupees 74 pesay by year 3 so on
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and so forth
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and it is in the 14th year that we will
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achieve a pe
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of 1 in the case of avenue supermarkets
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so figure this what started as a pe
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of 116 is now down to a 14 year holding
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period
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by which this business can potentially
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give us a p
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e of 1. this is more or less a
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simplified version of how growth
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investing works
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and probably why funds who adopt this
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style of investing
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are not afraid to pay top dollar for
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high quality businesses
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in addition to the pe ratio another
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quality metric that warrants your
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attention
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is the net profit margin the average
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indian company
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in the nifty 500 has a net profit margin
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of seven to eight percent but the access
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long-term equity portfolio companies
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average
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a net profit margin of around 15 percent
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the net profit margin is a strong
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determinant of
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quality and a great proxy for formidable
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companies
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with a recognizable brand name a quality
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product and pricing power
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and the final quality metric and perhaps
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the least
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discussed one is the free cash flow
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generated by the business
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free cash flow refers to surplus cash
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generated by a business
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after paying off all operating at
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capital expenses
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let me explain the concept with a simple
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example
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say you own a furniture shop so you
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bought some machines
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employed some workers got them the raw
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materials the word the ply board
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and you're able to sell the finished
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products at a monthly profit of 10 000
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rupees
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so that's a positive operating cash flow
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of 10
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000 for your business however since wood
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cutting machines and tools tend to break
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or require frequent repairs
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let's say this ends up in costing you 12
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000 rupees every month to replace them
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so technically your capital expenditure
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is swallowing
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your entire cash from operations and you
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end up with a negative cash flow of 2
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000 rupees
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this is not a good business to be in
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because
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while you're making profits on paper in
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reality
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you're losing real money so when our
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research team compiled the free cash
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flow data
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for the access long term equity fund it
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came as no surprise to find that the
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fund managers were heavily favoring
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businesses
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which have strong free cash flow in fact
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when we exclude the banking and finance
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companies from this list
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we see that all but one company has
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positive free cash flow which speaks
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volume of the quality
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and sustainability of that business
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remember
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businesses that generate high and
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consistent positive free cash flow
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can fund their organic growth from
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internal accruals
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instead of having to take loans or raise
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additional capital
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this makes these businesses extremely
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valuable to an investor
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and often command expensive valuations
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in the stock market
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[Music]
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the shareholders of the company are the
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owners of that business
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and it is the management team's
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responsibility to take the best decision
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on behalf of the shareholders
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shareholder value can be looked from two
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perspectives
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the first is the quality of management
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which includes an understanding
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of the governance practices past record
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of the senior management team
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executive compensation stock options and
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other policies drawn by the management
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from time to time
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this is not something that can be
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ignored as there have been many
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many instances where executives or
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promoters have destroyed crores of
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shareholder wealth
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by taking harmful decisions or
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indecisions
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which serve their needs more than that
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of the investors
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the portfolio construct of the access
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long-term equity fund shows
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that they earmark a high weightage to
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the quality of management team
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when choosing to invest in a business
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the second part to shareholder value
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are the quantitative metrics around
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returns
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which explain the efficiency at which
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the business is generating returns for
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the shareholders
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this is done by examining two key
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metrics
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the return on equity and the return on
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capital employed
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return on equity or roe is the amount of
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profit generated
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for every one unit of shareholders money
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so if the roe is on the higher side then
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the business generates
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a lot more cash internally which is
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great from a valuation standpoint return
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on capital employed or roce
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measures the efficiency with which a
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business uses its capital
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the roce is measured using the ebitda
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as a percentage of the total capital
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employed which
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includes equity and debt the information
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on the access long-term equity portfolio
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clearly shows
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that the fund management team has good
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warmth towards businesses
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with high return on equity and high
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return on capital employed
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almost 80 percent of the portfolio
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companies have sufficiently good roe
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and roc values with nestle india
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and tcs showing some outstanding numbers
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to kind of put it together high roe and
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high roc
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are favorable indicators of performance
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and even the biggest
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investors in the world vouch for these
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metrics
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[Music]
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the final part of our research is not
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metric driven
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but shows the importance of focused
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diversification
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unlike many other funds in the elss
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category
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the access long-term equity fund does
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not over diversify by investing in 50 or
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60 companies
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our research shows that the fund
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averages just around 30 companies
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at any given time which provides
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sufficient diversification and risk
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management
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this also means that the fund management
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team has a lot more conviction in these
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businesses
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i mean just look at this table in 14
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out of the 29 portfolio companies that's
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half the number of companies
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the access long-term equity fund owns
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one percent or more
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of the shares of the company and in the
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case of torrent power
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ttk prestige and symphony limited
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this single fund owns over four percent
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of the outstanding shares in these
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companies that's a lot of conviction and
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when that's the case
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it's fair to assume that there will be a
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lot more research
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and business understanding that the fund
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management team will partake
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before investing in any of these
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companies
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[Music]
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while our research was geared towards an
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understanding of how the fund management
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team
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at access mutual fund screens and
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selects companies
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there's a lot we can learn from this
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exercise and deploy in our own
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investment portfolios
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so let's recap what we have learnt in
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the first section we understood the
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importance of setting
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boundaries access mutual fund does that
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by avoiding
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public sector companies other investors
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like warren buffett
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and charlie munger did that for years by
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avoiding technology stocks
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and strictly restricting their universe
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to the sectors that they understand
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in other words define your circle of
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competence
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in the second section of this video we
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learned the science of
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identifying compounders with essential
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growth metrics around revenue
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operating profits and earnings per share
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remember
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growth metrics act as a strong valuation
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catalyst
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the third section was on paying for
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quality where we established the
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connection between the price of a share
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and the growth metrics using the pe of
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one rule
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with avenue supermarkets we also looked
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at the net profit margins
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and the importance of identifying free
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cash flow generating businesses
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which in my opinion is more important
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than the more commonly used accounting
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profits
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we then staked our claims as a
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shareholder
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in terms of investing in quality
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management that maximizes shareholder
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returns
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and speaking about returns our investing
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checklist
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gets a lot more juice with the
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introduction of return
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on equity and return on capital employed
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the final lesson was not on watering
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down your portfolio with
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too many stocks and the importance of
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focusing more time
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on research and analysis this reminds me
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of a benjamin graham quote where he said
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if you are shopping for stocks choose
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them the way you would buy groceries
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and not the way that you would buy a
[1007]
perfume a very simple yet
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a very powerful lesson we believe these
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points come very close to establishing
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how the access fund management team is
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looking at companies
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proof of which is available in the last
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decade
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of topping the performance charts i hope
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you like this video and will draw many
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learnings
[1028]
from the data and the insights presented
[1030]
don't forget to subscribe
[1032]
like comment and share this video with
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your friends and colleagues
[1036]
thank you for watching and i look
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forward to catching up with you
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next week with another cycle video
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mutual fund investments are subject to
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market risks
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read all scheme related documents
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carefully
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