There are various green shoots visible that point to gradual economic recovery. Additionally, the Union Budget 2020 made way for economic growth by proposing various measures and incentives to boost growth of small and medium enterprises as they are vital to keep the wheels of the economy moving.

Small cap stocks tend to perform well when economy grows. This makes it an attractive opportunity for investors looking to create wealth over a long term through small cap fund focusing on quality stock picking.

Axis Small Cap Fund (ASCF) is one such small cap fund that looks to invest in high conviction small cap stocks to appreciate wealth.

The fund was launched in November 2013 and currently manages asset worth Rs 2,084 Crores. Mr Anupam Tiwari is the fund manager of the scheme since October 2016, who has over 14 years of experience in financial markets.

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

Data as on February 12, 2020
(Source: ACE MF)

ASCF has showcased extra-ordinary performance in the last five years. If you had invested Rs 10,000 in ASCF five years back on February 12, 2015 it would have appreciated to Rs 19,505 now (as calculated on February 12, 2020). This translates into compounded annualised growth rate of 14.3%. In comparison, a simultaneous investment of Rs 10,000 in its benchmark Nifty Smallcap 100 – TRI would now be worth Rs 11,858, a CAGR of just 3.5%. While the fund initially struggled to maintain a sustainable lead over the benchmark, its superior performance in the last couple of years enabled it to generate significant alpha for its investors.

Graph 2: Axis Small Cap Fund’s year-on-year performance

*YTD as on February 12, 2020
(Source: ACE MF)

Launched towards the end of CY 2013, ASCF has a track record of little over 7 years. The year-on-year performance comparison of ASCF relative to its benchmark Nifty Smallcap 100 – TRI shows that the fund outperformed the index in 5 out of last 7 calendar years. ASCF’s outperformance as compared to benchmark in these years ranged between 2-30%. The fund lagged the benchmark only in CY 2013 when it was newly launched and during the momentum driven rally of CY 2017. ASCF’s performance in CY 2018 and CY 2019 is noteworthy because the fund managed to efficiently manage the downside risk when many small cap stocks corrected sharply during this period. The fund continues to generate enhanced lead over the benchmark in the current year as well.

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

Scheme Name	Corpus (Cr.)	1 Year (%)	2 Year (%)	3 Year (%)	5 Year (%)	Std Dev	Sharpe
SBI Small Cap Fund	3,493	-0.91	4.48	15.51	21.47	18.67	0.14
HDFC Small Cap Fund	9,872	-6.66	4.11	14.26	14.86	16.18	0.08
Axis Small Cap Fund	2,084	11.43	8.03	13.39	15.86	13.41	0.20
L&T Emerging Businesses Fund	6,123	-9.65	-1.69	13.15	13.48	16.30	0.05
Nippon India Small Cap Fund	9,064	-7.12	-0.16	12.74	16.80	18.86	0.07
Kotak Small Cap Fund	1,592	-2.29	-1.51	8.31	13.70	16.41	0.05
ICICI Pru Smallcap Fund	1,030	0.08	-2.75	7.05	8.48	17.59	0.04
Franklin India Smaller Cos Fund	7,188	-7.85	-3.46	6.67	13.55	15.01	-0.03
Aditya Birla SL Small Cap Fund	2,374	-13.11	-7.78	5.78	12.28	19.45	-0.04
HSBC Small Cap Equity Fund	394	-12.65	-7.66	4.48	10.04	20.67	-0.04
DSP Small Cap Fund	5,264	-7.40	-6.97	4.43	14.54	18.91	-0.04
Union Small Cap Fund	352	-7.33	-4.53	4.17	4.83	17.60	0.01
Sundaram Small Cap Fund	1,149	-11.45	-10.10	2.98	9.89	21.20	-0.04
Quant Small Cap Fund	2	-14.42	-6.68	-2.30	2.38	14.94	-0.18
Nifty Smallcap 100 – TRI		-13.92	-11.05	3.16	5.88	22.65	-0.05

Returns are on a rolling basis and in %, calculated using Direct Plan – Growth option. Those depicted over 1-Yr are compounded annualised.
Data as on February 12, 2020
(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.

ASCF outperformed the benchmark and category average across rolling periods with substantial margin. On a 1-year and 2-year rolling return basis when most of the category peers generated negative returns, ASCF generated rolling returns of 11.4% and 8%, respectively.

In fact, the fund was among the category toppers across rolling periods. SBI Small Cap Fund and HDFC Small Cap Fund were the other top performers during the period.

The fund’s outperformance has come at a relatively lower risk. ASCF’s volatility has been far lower than the benchmark and category average. Even so, its risk-adjusted returns as denoted by Sharpe is the best in the category.

Investment strategy of Axis Small Cap Fund

ASCF aims to create an actively managed and diversified portfolio of predominantly equity & equity related instruments of small cap companies. The fund is mandated to invest minimum 65% of its assets in equity and equity related instruments of small cap companies, while the rest can be invested in other equity instruments, and debt and money market instruments.

The fund utilises bottom-up approach to select strong growth stocks and focuses on appreciation potential of individual stocks from a fundamental perspective. It carefully selects stocks to include companies having a robust business models and enjoying sustainable competitive advantages as compared to their competitors. ASCF utilises holistic risk management strategy in an endeavour to manage various risks associated with investment in equity markets.

Graph 3: Portfolio allocation and market capitalisation trend in Axis Small Cap Fund

Holding (in %) as on January 31, 2020
(Source: ACE MF)

Categorised as small cap fund, ASCF invests predominantly in equities of small cap companies. The fund’s allocation towards the segment ranged between 60-70% in the last one year. It also seeks opportunities in mid cap companies where it allocates around 10-20% of its assets. The fund has completely avoided investing large caps. ASCF does not resist from taking high cash calls where its holding has been in the range of around 10-25%. As on January 31, 2020, the fund allocated 70.9% of its assets in small caps, 16.1% in mid caps and the balance 13% were held in cash and equivalents.

Graph 4:Top portfolio holdings in Axis Small Cap Fund

Holding (in %) as on January 31, 2020
(Source: ACE MF) 

ASCF held a compact yet diversified portfolio of 42 stocks as on January 31, 2020. The top 10 stocks constitute 45% of its portfolio with no individual stocks having exposure of more than 6%. MAS Financial Services has the highest stocks allocation of 5.8%, followed by City Union Bank 5.6%, Galaxy Surfactants 5.1%, and Can Fin Homes 5%. Rest of the stocks in the top 10 holding have allocation in the range of 3-5%.

In terms of sector wise holding, the fund has the highest exposure to financial services which includes allocation to Finance stocks at 15.2% and Bank stocks at 6%. This is followed by Chemicals at 16.9%, Cement at 10.5%, and Construction at 6.9%. The other prominent sectors include Engineering, Auto Ancillaries, Hotels, Consumer Durables, Infotech and Consumption, among others.

Top contributors

Among the stocks in the fund’s portfolio MAS Financial Services, Fine Organic Industries, NIIT Technologies, and Vinati Organics contributed immensely to the gains with a weighted return of around 14.7%. The fund also benefitted from its holdings in Can Fin Homes, Heidelberg Cement India, Galaxy Surfactant, Blue Star, VST Industries, JK Cements, etc.

However, stocks like TCNS Clothing, Igarashi Motors India, Gulf Oil Lubricants, Varroc Engineering, etc., eroded some of its gains.

Suitability of Axis Small Cap Fund

ASCF has managed to create significant alpha for its investors with careful stock-picking techniques and efficient risk management. The fund holds a diversified portfolio of stocks and sectors to balance risk and rewards. Small cap funds are prone to short-term volatility though they can be worthy long term bets. This makes ASCF suitable for investors with high risk appetite and investment horizon of at least 5-7 years.

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.

This article first appeared on PersonalFN here