Ashoka India Equity 29 January 2020

Ashoka India Equity’s (AIE) management team uses detailed cash-flow analysis to pick a concentrated portfolio of what they view as the most attractive Indian equities, aiming to outperform the market in all macro environments thanks to stock selection. The team looks for the most compelling investment opportunities across the market capitalisation spectrum, with over 50% of the current AIE portfolio invested in mid caps and small caps.

This stock selection process uses a unique approach to cashflow analysis developed by Prashant Khemka, the founder of the management company, and former head of India and global emerging market equities at Goldman Sachs. The team believes this approach is superior to the standard valuation metrics fund managers use as it properly captures the cash generative qualities of a business.

The performance of the strategy suggests there may be value in this approach: since launch in July 2018, AIE has strongly outperformed the market thanks to stock selection, as we discuss in full in the Performance section. It has done so with steady outperformance in rising and falling markets too. The track record of the investment approach itself is longer, both in other funds run by the adviser company White Oak Capital Management, and in Prashant’s time at Goldman Sachs. AIE offers access to a process which has taken years to hone, and the track record indicates success in making stock selection the source of returns rather than sector or market cap weight.

Another key element to the process is the focus on corporate governance and forensic accounting. This has so far helped the team avoid various frauds and irregular accounting blow-ups that have affected some Indian companies and mainstream funds exposed to them. The White Oak Capital teams focus on finding companies where management’s interests and those of any controlling shareholders are strongly aligned with those of minority shareholders. The team are locally based in Mumbai, and as such bring local knowledge to this endeavour.

AIE has been constructed with similar ideas in mind about aligning interests. At the portfolio level, the analysts are compensated predominantly based on an attribution analysis of their sectors’ contribution to the portfolio performance. At the trust level, there is no management fee but only a performance fee worth 30% of the outperformance of the benchmark, the full details of which are in the Charges section. There is also an annual redemption facility which allows investors to exit in full at NAV less costs.

AIE has only £69m in net assets, although it has been growing steadily thanks to strong performance leading to demand for issuing shares – the trust has mainly traded on a premium since launch. Last November the board announced a one-year issuance programme which allows it to issue up to 125 million shares (at a premium) over the course of the next year through a variety of means (see the Discount section).

Having met with Prashant, we were extremely impressed with the dedication to his craft and the attitude he has instilled at the heart of the team’s culture. Prashant has an iconoclastic attitude, which to us is reminiscent of investors such as Terry Smith: he has designed a process from the ground up, assuming nothing and developing his own metrics to capture what he wants to find. One of his tasks has been to find analysts who share his dedication and his belief that detailed cashflow analysis is the secret to good stock selection.

We understand that Prashant’s track record at Goldman Sachs was exceptional. During his nine years as CIO and Lead Portfolio Manager of GS India Equity (GSINDAI LX), the fund returned 118.1% in total returns, net of fees, compared to 25.7% for the MSCI India IMI benchmark. After he was appointed CIO and Lead Portfolio Manager of GS GEM Equity (GSEMEIA LX Equity), over almost four years the fund returned 33.2% in net total returns compared to 13.2% for the MSCI Emerging Markets benchmark. At White Oak he has built a team of dedicated stock analysts to implement the ideas and processes which he developed during his time at Goldman Sachs (and before), which he joined in 2000 before leaving to found White Oak Capital in 2017.

We think investors will benefit from the work put into the unique approach to stock analysis. India is particularly fertile ground for a stock-picking approach, according to recent Wall Street Journal research which concluded that active managers in India generate the highest and most consistent alpha among all markets in the world. The canny design of the trust, which aligns the interests of board, management and shareholders, should also give shareholders further confidence. The performance fee-only structure, which is earned over three-year performance, could ensure the team are highly motivated to consistently outperform, as could the annual redemption facility. Meanwhile, the compensation of the team being based predominantly on their performance in their sectors creates accountability and strong personal interest in AIE’s success.

Investors may ask themselves why they should bother with an India-only trust. We think India is one of the most exciting places to invest in the world given its economic potential, but like any other emerging market the Indian stock market has a wide spectrum of corporate governance standards which requires a dedicated expert hand to navigate. As India makes up less than 9% of the MSCI Emerging Markets Index, this is unlikely to be forthcoming from a generalist trust.

India’s strong demographics mean there is huge potential for businesses to grow serving the local market. Meanwhile, the current government is reform-minded and focused on a once-in-a-generation shift of the economy to the digital age. This, allied with an entrepreneurial culture, means that India offers a rich and diverse set of businesses to invest in. However, corporate governance assessment can be complicated, with companies often having family ownership or other key shareholders whose motivations and interests need to be understood. This is likely to reward local knowledge. We think the sheer weight of coverage that White Oak Capital Management can bring to bear on this portfolio (with nine dedicated analysts, all based in Mumbai) means that AIE has the potential to consistently generate insights others can’t and to create alpha.