WF: Your fund proposes to invest up to 35% in overseas stocks. Will the global exposure of the fund cater primarily to risk reduction / mitigation effort or to generate alpha for the fund?

Jinesh - Axis Growth Opportunities Fund is an open ended large and midcap fund which aims to invest 65%- 70% in domestic equities and 30-35% in global markets. India and global markets have historically had a fairly low correlation and hence, a combination strategy provides a dual benefit of diversification and risk mitigation through active allocation to a global portfolio. In this initiative we give investors an opportunity to invest in global opportunities that are not available otherwise in Indian markets and in the process endeavor to generate alpha.

WF: Why have you chosen to invest in direct stocks overseas rather than a feeder fund into one of Schroders’ funds with an established track record?

Jinesh - For the purpose of this fund we intend to sign an advisory agreement with Schroders Investment Plc. With this we aim to bring the Schroders expertise in global investing to Indian investors. However, the structure of the fund gives us a discretionary leeway on the method in which global equity component is run keeping in mind the unique needs of Indian investors. The floating mandate allows us to manage the exposure to global securities basis the opportunities we see while leveraging the global research skillset of the Schroders international team. This would not have been possible in a feeder fund approach.

WF: How is Axis MF’s investment philosophy aligned to that of Schroders Group’s?

Jinesh - Schroders as a group has been on the forefront in identifying long term trends through proprietary research for over 200 years in the global markets. Its philosophy has anchored around the prospects for forward-looking earnings surprise, a feature that is largely disconnected from trailing style characteristics. This is done through an in-depth understanding of internal synergies and the market environment for each of the 5,000+ companies under their coverage. The investment focus relies strongly on growth characteristics with an eye on long term sustainability of this earnings surprise.

Since inception, our investment philosophy at Axis, focuses on sustainable growth and emphasizes on quality. The Axis & Schroders collaboration neatly ties the two investment philosophies through a complementary approach and investment style thereby giving investors a clear understanding of the investment approach to this fund.

WF: Within the global exposure, which countries and themes will you primarily focus on, in casting the initial portfolio and how do you propose to leverage Schroders’ capabilities in doing this?

Jinesh - Typically, we will look for strategic exposures in Americas, Europe ex- UK, Middle East, Emerging Markets & Japan. The idea is to play themes that would not be ordinarily available in the Indian market. Key disruptive themes in information technology, healthcare and consumption may form part of the global portfolio. The aim will be to identify long term themes which offer significant growth opportunities.

WF: Your fund proposes to allocate 35% overseas, 30-35% to domestic large caps and 35-40% to domestic midcaps. What leeway within these broad allocations does the fund manager have – i.e. what is the range that he has available to manage dynamically?

Jinesh - The fund will maintain an exposure of 65%-70% to domestic equities at all times. Our global portfolio will generally comprise of blue-chip stocks which will fall in the large cap space giving us flexibility to go to a higher large cap exposure when required. Within these broad ranges the fund manager may tweak the portfolio depending on the relative risk-reward proposition.

WF: How does the fund propose to tackle the weak macro factors (currency, interest rates, CAD etc.,) and relatively strong local micro factors (earnings growth) in casting the initial portfolio of this new fund?

Jinesh - India continues to remain a bright spot for EM investors despite the currency fall and strong bouts of volatility faced in the last 2 months. The fact remains that the entire EM basket has been badly affected by the end of easy money which was used as bedrock to grow their economies. Like any investor, global investors look for the highest risk-adjusted return. That is currently heavily skewed towards the US and other developed markets given higher yields and low currency risk. Hence, the risk-off trade is affecting India in tandem with the larger EM sell-off.

Crude has been a further dampener to the ‘India trade’. As India imports a majority of its oil requirement, macro factors have seen a significant reversal and will continue to face headwinds as oil continues to rise. On the bright side, domestic consumption and improved productivity remain key positives. This is evident in the GDP and IIP numbers. India currently has one of the highest real rates globally and a fairly valued currency on a REER basis.

The idea of the fund is to diversify risks across sectors, geographies and economic cyclicality. Our internal studies show that the Indian market has historically maintained a low correlation to the rest of the world due to the relative inward looking nature of its economy. Hence, when Indian markets do not do well like in the current instance, a global allocation minimizes the downside risks both on account of the currency depreciation and global equity stability.

WF: When you cast the initial portfolio, what are the key domestic sectors that you propose to include / exclude?

Jinesh - Given the current market scenario, we remain cautiously optimistic on Indian markets. We will deploy funds in a staggered manner with an intention to hold a good quality at relatively reasonable valuations given the carnage we are currently witnessing. This is an ideal time for long term investors to look at tactical allocations. Indian fundamentals currently remain positive and we do expect significant recoveries in corporate sector earnings over the next few quarters given the solid macro-economic conditions and buoyant rural sector.

On a sector specific basis, we like the rural and consumption theme in the run up to the elections. The monsoons this year have been favorable and hence, we anticipate higher discretionary spend during the festive season. This is likely to have a positive impact on corporate B2C businesses. We are also looking at market specific disruptors and niche businesses, which have scalability of business and a long term sustainable business outlook.

WF: Despite the current market correction, experts believe that the valuations of quality stocks remain expensive. Do you subscribe to this view? How do you propose to navigate through this aspect during the initial cast of portfolio?

Jinesh - Quality has seen a quarter of pain, which may be attributed to a correction given their run up in the last year. With the recent market fall the valuations in these companies has come off to some extent. However, the growth stories in these companies continue to remain healthy.

Our universe of stocks, basis channel checks, continue to see strong earnings growth and margin expansion. Many of these continue to remain core holdings in our other portfolios and the fall in prices of these companies gives us a chance to add to our existing positions and allocation to the new fund will be in line with our overall fund level view on these stocks.

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Information set out above is included for general information purposes only and does not constitute legal or tax advice. In view of the individual nature of the tax consequences, each investor is advised to consult his or her own tax consultant with respect to specific tax implications arising out of their participation in the Scheme. Income Tax benefits to the mutual fund & to the unit holder is in accordance with the prevailing tax laws as certified by the mutual funds consultant. Any action taken by you on the basis of the information contained herein is your responsibility alone. Axis Mutual Fund will not be liable in any manner for the consequences of such action taken by you. The information contained herein is not intended as an offer or solicitation for the purchase and sales of any schemes of Axis Mutual Fund. Mutual fund investments are subject to market risks, read all scheme-related documents carefully.

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