What makes the Axis Max Life sustainable yield index stand apart from other indices?

Over the past few years, various factor-based indices have become popular in India. Historically, the majority of such strategy indices have favouredfactors such as quality score, momentum score, Jensen Alpha as the key to determine stock-picking methodology used by such indices. But there are other factors too that can be used to construct factor-based indices such as Free Cash Flow (FCF) yield for non-financial companies and dividend yield for financial companies.

The Axis Max Life Sustainable Yield Index is a customised index based on the methodology developed by Axis Max Life Insurance and is computed and maintained by NSE Indices Limited as an index computing agent. This index aims to identify top-performing stocks from the NSE 500 universebased on the free cash flow (FCF) yield for non-financial companies and dividend yield of financial companies.

Mukesh Agarwal, CEO, NSE Indices Limited, said, “We have worked with Axis Max Life Insurance Company to create this customised index based on Axis Max Life Insurance’ methodology. The Customised Index will be computed and maintained by NSE Indices Limited.”

Read on to know key features that make the Axis Max Life Sustainable Yield Index unique as compared to other factor-based indices.

Use of FCF Yield and Dividend Yield Factor

As already mentioned, the key factor used by this customised index to pick stocks from the universe of companies featured on the Nifty 500 stock universe is the free cash flow yield (for non-financial companies) and dividend yield (for financial companies). In this case, dividend yield is used as a proxy for FCF yield as free cash flow cannot be calculated for financial companies. So, only NSE listed companies that have the highest free cash flow yield/dividend yield are included in this index.

How Does This Impact Stock Selection? 

You might be wondering why the use of free cash flow/dividend yield might be important and here’s why. A non-financial company with high free cash flow yield is one that is generating more cash than its capital expenditures. This means that the company has significant amount of cash on hand to invest in expansion to grow its business and is less reliant on external funding to maintain its operations. So, this type of non-financial company would typically have low level of debt and high income potential, which may lead to significant business growthresulting in an increase in its stock price in the future.

Similarly, in the case of financial companies, dividend yield serves as an equally effective measure of a financial company’s ability to generate cash in excess of its expenses.The availability of this extra cash leads to the distribution of dividends for the shareholders. So companies with higher dividend yields are typically those with higher cash flows and distribute higher dividends to shareholders.

The use of these metrics can therefore help in the identification of companies that are cash rich and have a lower dependence on external funding to carry out/grow their operations. Such companies can potentially perform better during periods of lackluster economic growth by investing their internal cash surplus to expand operations and grow their business. This way the company can potentially sustain growth even during economic slowdowns and help in sustainable wealth creation for investors across different economic cycles.

Use of Equal Weight Methodology

The Axis Max Life Sustainable Yield Index is a customised index that uses anperiodic capped equal weight methodology to determine the individual weight of constituent stocks featured on the index. This weightage also meets the criteria specified by IRDAI regarding capping of individual stocks and sectors featured on the Index. What’s more, the benchmark is the Nifty 500 Equal Weight Index.

This is different from the market cap weightage used by a number of well-known strategy indices currently available to investors. As a result, this index features significantly lower concentration risk with respect to specific themes/sectors as well as individualstocks.What’s more the equal weight approachalso leads to higher allocation towards mid and small cap stocks as compared to a market cap oriented index.

How Does This Impact Investors?

Due to the use of an equal weight methodology, the Axis Max Life Sustainable Yield Index and an index fund that tracks this index such as the Axis Max Life Sustainable Wealth 50 Index Fundcan benefit investors in 2 key ways. Firstly, the index features a highly diversified selection of stocks that is sector as well as market cap agnostic. This helps reduce the potential ability that any single stock or stocks from any particular sector to influence the overall performance of the index. This has the potential to help the index and an index fund tracking this index to sustain growth during periods of economic boom while limiting the potential drawdown occurring due to underperformance of a specific stock or basket of stocks belonging to a specific sector or theme. Fund factsheet for more details here.

The Bottom Line

The Axis Max Life Sustainable Yield Index and an index fund such as the Axis Max Life Sustainable Wealth 50 Index Fund that tracks the index presents a unique opportunity to investors for long-term wealth creation by using the free cash flow yield (for non-financial companies) or dividend yield (for financial companies) factor - which have remained relatively untapped till date. Implementation of this new market cap and sector-agnostic factor has the potential to help investors benefit from relatively less popular stocks and sectors/themesthat have the potential of providing sustainable growth to investors in the long term. 

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