From 2011 onwards, Axis MF has launched a series of 3-4 year closed-end, income schemes with marginal equity exposure (like a MIP) under the common name of Axis Hybrid Fund. At its peak, the AUM under these schemes was ~7600 crore. The current AUM of the outstanding schemes is estimated to be around 5800 crore. Despite the considerable AUM of these schemes, there is very little awareness about their portfolios and performance.

These schemes first came to my attention, a few months ago. Since then, I have had the opportunity to look at them closely, and have found a lot that is questionable and disturbing. In this post, I’d like to shed light on some of the issues that I have seen. For the record, I sent an email to the fund house, raising the points in this post, but received no acknowledgment or response from them.

**Active or Passive?**

Each scheme under the Axis Hybrid Fund series has been/ is passively managed. The annual reports confirm this. The approach has been to manage the debt portion of each scheme like a FMP, and to allocate the equity portion to Nifty Call Options that are held till their expiry. The problem is that, going by the Scheme Information Documents (SID), it would seem that the equity portion is supposed to be actively managed. Consider this extract from the SID of the first scheme in the series:

*For the equity portion, the focus would be to build a diversified portfolio of strong growth companies, reflecting our most attractive investment ideas, at all points of time. The portfolios will be built utilizing a bottom-up stock selection process, focusing on appreciation potential of individual stocks from a fundamental perspective.*

From the fourth scheme onwards, the text was slightly modified to include a caveat *“to the extent the fund invests in equity shares”*. Nevertheless, the SIDs have continued to mislead by unambiguously stating that the schemes “*will invest in a diversified portfolio of Equities & Equity Related Instruments (including options premium) across market capitalisation.”*

But that isn't all. Three of the schemes in the series were rolled over on maturity, for another 3-4 years. Ever since then, they have stopped holding any equities in their portfolios: shares or derivatives. That’s despite the fact that the indicative asset allocation provides for the schemes to have 5%-30% of their portfolios in equities “under normal circumstances”. All other schemes continue to hold the Nifty call options.

There is a bigger question, though, that lingers in my mind: in a closed-end fund (especially one with a 3-4 year maturity), does buying and holding an index (or index call options) really constitute an investment strategy? As it happens, one portfolio manager whom I spoke to, had this to say: “That is hardly a strategy. That is speculation.”

**Excessive Expense Ratios**

Generally speaking, the norm is for passively managed funds to have lower expense ratios than similar, actively managed funds, and for income funds to have lower expense ratios than equity funds. FMPs usually have the lowest expense ratios among income funds, and that’s mostly true for Axis MF’s FMPs (Axis Fixed Term Plan). Since 70%-95% of the portfolio of any Axis Hybrid Fund is managed as a FMP, these schemes should logically have expense ratios that are only slightly higher than the FMPs launched by the fund house. Quite to the contrary, the actual difference between the two is glaring.

__Average Expense Ratios: FY 17__

Regular Plans | Direct Plans | |
---|---|---|

Axis Fixed Term Plan series | 0.50% | 0.07% |

Axis Hybrid Fund series | 2.53% | 1.34% |

Data source: Abridged Annual Report 2016-17

For those who can do the maths, if you assume that, on an average, 80% of the portfolio of each Axis Hybrid Fund scheme was managed as a FMP, and apply the average expense ratio of Axis Fixed Term Plan series to that portion, you will conclude that for the passively managed Nifty call options, the investors in regular plans were charged 10.6% of the equity AUM as expenses. Think about that for a moment. Is there any measure by which such a number can be justified?

There’s one other thing that disturbs me. You may remember those three schemes I mentioned above which were rolled over and which no longer hold any equities. Those roll-overs happened between Jan-March 2017. Well, despite being now managed exactly like FMPs, their average expense ratio in the first 6 months of the current financial year was 2.84% (source: unaudited half yearly financials, Sep 2017).

I suspect that the Axis Hybrid Fund series are among the most expensive passively managed mutual fund schemes in the world.

**Questionable Performances**

All the schemes in the series are benchmarked against the CRISIL MIP Blended Index. On account of the exposure to derivatives (which increases volatility), it is best to compare performance only across the complete tenure of a scheme. Even so, the results vary significantly. While the first three schemes in the series each outperformed the benchmark by an average of 2.1% p.a., the next eight schemes each underperformed the benchmark by an average of 4.2% p.a. By any standard, that’s an astonishing level of underperformance, even after considering the excessive expensive ratios of the schemes. Not only that, each of these eight schemes underperformed their own liquid fund (Axis Liquid Fund) by an average of 1.2% p.a. The table below gives the relative returns of each of the schemes in the series that have matured.

Return p.a. | ||

Scheme | Benchmark | |
---|---|---|

Axis Hybrid Fund - Series 1 | 11.2% | 9.4% |

Axis Hybrid Fund - Series 2 | 11.6% | 9.4% |

Axis Hybrid Fund - Series 3 | 12.0% | 9.7% |

Axis Hybrid Fund - Series 5* | 6.2% | 11.3% |

Axis Hybrid Fund - Series 6* | 7.1% | 12.0% |

Axis Hybrid Fund - Series 7* | 7.2% | 11.3% |

Axis Hybrid Fund - Series 8 | 7.7% | 11.8% |

Axis Hybrid Fund - Series 9 | 7.7% | 12.1% |

Axis Hybrid Fund - Series 11 | 6.6% | 10.9% |

Axis Hybrid Fund - Series 12 | 6.6% | 10.3% |

Axis Hybrid Fund - Series 13 | 6.4% | 9.7% |

Returns are for regular plans and for the entire tenure of each scheme

* Axis Hybrid Fund - Series 5, 6 & 7 were rolled over and their returns are for their original tenure

Data/ Information sources: Axis MF, CRISIL, NJ India Invest, Value Research

What makes those numbers even more awful is the volatility that accompanied the returns. I would like to particularly mention Axis Hybrid Fund – Series 5 which, apart from giving the lowest return, had, at one point, a level of volatility that rivalled that of equity funds. As evidence, consider the chart below which covers the first six months of the scheme.

On the basis of the chart above, one could be mislead into thinking that this was an equity scheme rather than an income scheme.

All of this leads to an obvious question: why would anyone have invested in any of these schemes?

It would seem that these schemes were mostly ‘sold’ rather than ‘bought’, if you get what I mean. Going by the latest disclosures, 99.7% of the AUM came through distributors. Probably most tellingly, over 92% came through associate distributors of Axis MF (presumably, Axis Bank). I can only imagine what kind of conversations they had with their clients.