JPMorgan Indian (JII) invests with a long-term, quality approach in Indian equities. The managers, Rajendra Nair and Ayaz Ebrahim, aim to identify those companies which can grow their earnings consistently faster than the market, and invest in them for the long term, applying a valuations framework for buy and sell decisions. ESG issues figure highly within the risk assessments carried out for each stock, which influences the assessment of value applied.
Rajendra has managed the portfolio since 2003, and was joined by Ayaz in July this year after the retirement of his long-term co-manager Rukhshad Shroff. The process remains fundamentally the same, but the implementation is under review as the managers look to improve performance after a tough period. Ayaz is co-head of the Asia Pacific Equities team.
In the past three years JII has underperformed the index, due to some single stock calls and being caught with quite cyclical positioning in February when the pandemic struck. As we discuss in the Performance section, this is at odds with the long-term track record of the strategy, which has generated significant outperformance since launch in 1994.
Following the arrival of Ayaz, the weight to companies with a presence in the digital economy has risen, while the allocation to financials has fallen. In both cases the aim is to position the portfolio better for the next three to five years.
After a rough period for relative performance and the Indian economy, the discount is wide at 17.4%. This figure is over two standard deviations below the long-term average, as discussed under Discount. The board has recently begun to employ buybacks.
There are attractions to investing in India for the long term. The country’s projected demographic growth and the relatively low level of penetration of goods and services, means there is huge potential for companies to generate strong earnings growth. However, as JII’s managers acknowledge, the near-term outlook is cloudy. India has been hit hard by the pandemic, which came at an unfortunate time as the country is also suffering from a slow-motion banking crisis.
Yet there are clear areas of opportunity, for example in the expanding financial and digital services markets, where JII has a strong presence. The managers’ focus on sustainable growth should hopefully see them pick the long-term winners rather than companies which see a burst of success before declining to the mean. The discount of 17.4% is attractive as a long-term entry point, we think, with the Z-score of -2.3. While recent performance has been disappointing, largely this has been due to the unexpected shock of the pandemic. The stock selection approach taken by the EMAP team has been highly successful on their regional portfolios in recent years, and we hope that Ayaz’ greater involvement will see that carry over to JII.
We also think the full integration of ESG issues within the stock selection process means that JII is well-suited to the ESG-conscious investor. ESG issues influence the required valuation for an investment, and are considered integral elements of what makes a high quality company.
|Focus on stock fundamentals and on quality could create resilience to difficult economy||Highly active approach can lead to periods of underperformance|
|Extremely wide discount relative to long-term history||India faces near-term headwinds|
|Huge potential in India as a market thanks to demographics and low state of development||Change in management team creates some uncertainty|