Welcome to  PersonalFN’s weekly analysis on diversified equity mutual funds! In this issue, we have analysed Axis Small Cap Fund, highlighting its performance, peer comparison, investment strategy, fundamentals, portfolio, and suitability.

Axis Small Cap Fund is a Small Cap Mutual Fund that has proven its high alpha potential with its ability to stand strong during bearish market phases. With a focus on quality stocks, the fund has generated superior risk-adjusted returns for its investors in the long run.

What is the growth of Rs 10,000 invested in Axis Small Cap Fund five years ago?

Past performance is not an indicator of future returns
Data as of April 02, 2024
(Source: ACE MF, data collated by PersonalFN)

Launched in November 2013, Axis Small Cap Fund is among the largest and most popular schemes in the Small Cap Fund category having an AUM of Rs 19,606. The fund aims to generate alpha by maintaining a diversified portfolio of stocks across sectors. Axis Small Cap Fund focuses on investing in high-conviction, quality stocks available at attractive valuations and hold it with a long-term view until the full potential is derived. The fund efficiently limited the downside risk and stood among the top performers in the Small-cap Fund category during the mid and small-cap crash of 2018-19 as well as the market crash of 2020.

However, it has lagged many of its peers and the benchmark in the ongoing bull phase. 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 growth-oriented and quality stocks and the superior stock-picking ability of the fund management team has driven its long-term performance.

Over the last 5-year period, Axis Small Cap Fund has generated returns at a CAGR of 27.8%, thereby outperforming the benchmark Nifty Smallcap 250 – TRI by healthy a margin of about 4.5 percentage points. An investment of Rs 10,000 in Axis Small Cap Fund 5 years back would have now tripled to Rs 34,084 compared to a valuation of Rs 28,497 for a simultaneous investment in its benchmark.

Though most of this outperformance has come under its erstwhile fund manager, Mr Anupam Tiwari, the current management team comes with a rich experience. This gives the fund the potential to continue to do well in terms of long-term performance going ahead.

How has Axis Small Cap Fund performed on a rolling return basis?

Scheme Name	Corpus (Cr.)	1 Year	2 Year	3 Year	5 Year	7 Year	Std Dev	Sharpe
Quant Small Cap Fund	17,193	41.87	25.19	52.09	30.90	22.49	21.79	0.45
Nippon India Small Cap Fund	46,044	39.02	26.12	44.02	25.30	23.77	16.95	0.45
HSBC Small Cap Fund	13,747	35.38	23.42	41.87	20.41	19.43	17.05	0.43
HDFC Small Cap Fund	28,599	40.01	23.70	40.61	20.18	21.04	16.95	0.41
Canara Rob Small Cap Fund	9,595	24.73	20.57	39.84	28.36	—	16.53	0.40
Franklin India Smaller Cos Fund	11,823	40.54	23.77	38.88	19.28	16.91	16.35	0.40
Kotak Small Cap Fund	14,196	24.31	15.43	36.93	23.98	20.04	15.01	0.33
DSP Small Cap Fund	13,710	30.44	19.38	35.48	21.47	17.06	16.81	0.35
Axis Small Cap Fund	19,606	27.64	19.07	34.32	25.38	21.58	14.12	0.41
SBI Small Cap Fund	25,525	23.48	18.10	32.48	22.00	21.83	13.74	0.37
Nifty Smallcap 250 – TRI		35.04	17.36	35.59	17.84	15.22	19.43	0.32

The securities quoted are for illustration only and are not recommendatory.
Returns are on a rolling basis and in %. Direct Plan-Growth option. Those depicted over 1-Yr are compounded annualised. Risk ratios are calculated over a 3-year period assuming a risk-free rate of 6% p.a.
Data as of April 02, 2024
(Source: ACE MF, data collated by PersonalFN)
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 before investing. Past performance is not an indicator for future returns. The percentage returns shown are only for indicative purposes.

In the past, Axis Small Cap Fund scripted a superior track record of generating substantial alpha for its investors. However, the fund has slipped to the bottom quartile performers in recent years which has impacted its performance over the short to medium term. Notably, numerous other equity schemes of Axis AMC have also witnessed a rough patch in recent years as their investment strategy ran out of favour.

Nonetheless, over the long-term horizon of 5-7 years and over, the fund still stands among the top performers in the category and well ahead of the benchmark. Even though Axis Small Cap Fund has displayed a trait of trailing its benchmark and peers during bull phases, the fund clearly stands out during bearish market phases, thus rewarding investors well over complete market cycles.

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.

[Read: Can Small Cap Funds Deliver Big Returns Going Forward?]

What is the 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 invest the balance 35% of its assets in equity and equity-related instruments of non-small cap companies, debt & money market instruments, etc.

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. The fund aims to select quality stocks that have scalable business models and competent management. It looks for the following parameters to pick high-conviction stocks:

• Strong promoter pedigree, corporate governance and management with a sound track record of execution
• Capability of sustaining good ROE and ROCE numbers
• Ability to withstand event shocks
• Sound balance sheet
• Offers sustainable return potential with lower volatility

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). It believes that the key to successful investing in small-caps is patience and the ability to withstand short-term volatility.

What are the top portfolio holdings in Axis Small Cap Fund?

Holding in (%) as of February 29, 2024
(Source: ACE MF, data collated by PersonalFN)

Axis Small Cap Fund usually holds a large portfolio of 80-100 stocks. As of February 29, 2024, the fund held 100 stocks in its portfolio, with top holdings in Birlasoft, Narayana Hrudayalaya, Brigade Enterprises, Blue Star, and Cholamandalam Financial Holdings. The top 10 stocks in the portfolio together accounted for around 29.4% of its assets. Following a buy-and-hold approach, the fund has a low turnover ratio of under 15%, which highlights the fund manager’s conviction in each of its holdings.

In the last two years, Axis Small Cap Fund benefitted the most from its prominent holdings in Brigade Enterprises, Narayana Hrudayalaya, Ahluwalia Contracts, Birlasoft, and Bluestar that contributed about 18.7% to its absolute gains. The fund also benefitted from its allocation to KPIT Technologies, JK Lakshmi Cement, Krishna Institute of Medical Sciences, Persistent Systems, Vesuvias India, CIE Automotive India.

In terms of sectors, Axis Small Cap Fund’s portfolio has higher exposure to Finance, Infotech, Engineering, Construction, and Healthcare services that collectively form about 55% of its assets. The fund also has substantial exposure to Chemicals, Auto Ancillaries, Consumption, Consumer Durables, Cement, and Pharma, among others.

What is the liquidity profile of Axis Small Cap Fund?

As per PersonalFN’s analysis of Axis Small Cap Fund’s liquidity stress test, the fund will take 336 days to liquidate 100% of its portfolio. It will take the fund 37 days and 11 days, respectively to liquidate 50% and 25% of its portfolio. This makes the portfolio moderately liquid.

Do note that in contrast to the method prescribed by the AMFI, PersonalFN’s calculation considers a 10% participation in the three-month Average Daily trading Volume without multiplying by three and without disregarding the least 20% illiquid stocks.

Is Axis Small Cap Fund suitable for my investment goals and risk tolerance?

Axis Small Cap Fund has proven its ability to generate superior returns even during depressed market conditions. 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.

Watch this video to check out the best Small Cap Funds for 2024:

 

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