Review of Axis Long Term Equity Fund

Momentum Investing at Scale

Today we review another popular fund (large size ~ popular) - Axis Long Term Equity Fund (ALTEF). It is different from others in that it is an ELSS scheme. Before we get into the review of the fund, ELSS schemes “lock” you in for 3 years post investments. You can withdraw only after 3 years. In addition to that, you get exemptions on tax savings (up to a limit based on Section 80C). ELSS is not your generic “open” ended mutual fund schemes. Do not invest into them if you need them for emergency usages.

The fund has grown in size over time. The fund size growth has been almost linear from 2014 onward.

As usual we overlay the monthly performance chart against the two broad market indices.

Quite clearly, the fund has massive alpha over the two broad market indices. A quick check reveals 7.1% and 7.25% alpha against the Nifty Next50 and Nifty500 respectively. That is huge and impressive. And it is probably this reason that investors have been seeking investments into the fund. In particular, the out performance until 2014 is very important when the broad market indices pretty much did not move whereas the fund actually did well laying the stone for future AUM growth.

Let us compare against other major factor factor indices.

The fund is truly different and unique when compared to each of the known factors. It is obviously not a value fund (Nifty500Value50). But, we have some clues. It has under performed Momentum (Nifty Alpha50) post covid but has done better than Momentum during 2018-2020 period. Similarly it has done better than Low Volatility post covid whereas has been similar to Low volatility from 2018-2020 period. Let us compare the fund’s performance against other momentum implementations of momentum and low vol combination.

Momentum AND Low Volatility: The Nifty Alpha Low Volatility 30 Index selects stocks on the dual ranking criterion of momentum and low volatility. The S&P BSE Momentum index selects stocks based on their sharpe ratio which too has a component of raw returns and volatility. The BSE Momentum index has data available only for past 10 years. We start from Jul 2011 in the below graphs.

This is a pretty close correlation. If you run a peformance correlation, the fund has no statistical alpha against these strategies of momentum. I think it is indeed amazing that the fund has been able to keep up with a strategy and consistently deliver alpha over long periods of time. Let us also ensure to run a rolling returns graphs.

The fund clearly under performed these indices for about 2 years in 2016-2017 but has since rebounded and been tracking the indices pretty well. It has also been able to do this at scale. This tracking of returns with momentum at scale and with growing inflow of funds is good to see.

I think we can conclude that the fund manager’s strategy is influenced by Momentum and Low volatility investing.

Reasons to Invest

The fund is “different” from index. It has quite clearly shown that. The fund seems to be choosing a multi factor approach. This is good in that whenever one factor performs poorly, other factor can help. The Fund is an ELSS scheme helps avoid some behavioral issues of withdrawing when bad performance. Also, the fund manager has been the same person for the last 10 years. So long as the fund manager continues, we can assume similar stock selection. Remember, it is not necessary that the fund will “beat” the market. Purpose of active stock selection (at least to me), is to be different from market and this fund seems to do that quite well.

Reasons not to Invest

Momentum is not exactly scalable beyond a point. I would ideally like SID of scheme to disclose what their capacities are. Beyond a point, a fund *must* stop accepting more money as its strategy will be burdened with high AUM. In absence of any data, We must keep an eye on deviation from the index (S&P BSE Momentum index) for say 2-3 years. If there is significant digression, we can consider AUM weight is pulling the fund and exit.

Alternative There is another alternative to this fund. ICICI Prudential Alpha low Vol 30 ETF exists and we can be now sure that it can accept pretty large AUM. That is one good thing. I am hoping a FOF option for most people with a standard mutual fund option is made available as the volumes on the ETF are not good.

Conclusion

There is a strong reason to believe that fund is a multi factor strategy of Momentum and Low Volatility. There is a lot of academic and practitioner evidence to show that this is a pretty good investment strategy used across the world. The fund manager has been able to do this at scale. This is the most important thing about this fund. I think the fund manager needs to be given credit to ensure strategy was chosen for scale. Note that the fund may not beat the index all the time. Compare below graph of Nifty500 Vs the Nifty Alpha Low Vol 30 Indices.

There have been many times including recently when the Broad market has done better than this strategy. If you are willing to accept the “different” kind of performance from market, you can choose/continue to invest.