Axis Small Cap Fund: Discovering Big Potential of Small-Sized Companies

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.

Data as on March 02, 2022
(Source: ACE MF)

Axis Small Cap Fund has scripted an unbeatable 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 across various time frames. Even though Axis Small Cap Fund has trailed the benchmark and many of its peers by a significant margin in the last 2-year period, the fund stands among the top quartile performers in the category over the longer time period.

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 among the highest in the category.

Investment strategy of Axis Small Cap Fund

Axis Small Cap Fund is mandated to invest a minimum 65% of its assets in equity & equity-related instruments of small-cap companies, i.e. 251st company onwards, on 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 such 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 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.

Axis Small Cap Fund usually holds about 55-65 stocks in its portfolio. As on January 31, 2022, the fund held 64 stocks with top holdings in names such as Galaxy Surfactants, Brigade Enterprises, Birlasoft, Tata Elxsi, and Narayana Hrudalaya. The top 10 stocks in the portfolio together accounted for around 37.1% of its assets. Following a buy-and-hold approach, the fund has a low turnover ratio of around 20% which highlights the conviction the fund manager has in each of its holdings.

Axis Small Cap Fund has benefited the most from its exposure inTata Elxsi, Brigade Enterprises, Galaxy Surfactants, Grindwell Norton, Fine Organic Industries, SRF, Neogen Chemicals, and Coforge, that 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 16.1%. Infotech accounts for another 15.3% in the portfolio. The fund also holds significant exposure in Construction, Engineering, Healthcare Services, Auto Ancillaries, Cement, Consumption, Finance, and so on. 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 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 having 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.

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