Complete your registration today for a chance to win £50 John Lewis vouchers in our weekly draw Enter now
David Kimberley
View profile
Updated 16 Jun 2023
Save Article Download

Disclaimer

Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by Ashoka India Equity. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

The seemingly endless turmoil the world has seen over the past few years has made it very hard not to engage in macroeconomic predictions. Two years ago it was what the impact of Covid lockdowns would be. Today investors are more focused on inflation and how far central banks will go in hiking interest rates.

It is easy to understand why investors like to partake in this sort of behaviour. Take interest rate hikes as an example. Leaving aside how they are used as an input for valuing assets, rate hikes may lead to an economic slowdown, which would in turn lead to many companies performing poorly.

However, attempting to make macroeconomic calls like this is extremely difficult and you can end up a bit like the inhabitants of Laputa from Gulliver’s Travels, engaging in an activity that seems deeply logical but is ultimately closer to pseudoscience.

This is part of the reason that the analysts and managers of Ashoka India Equity (AIE) avoid making such calls. The managers views on doing so are captured succinctly by a letter they wrote to shareholders in 2021, where they noted that “decisions that are bereft of bottom-up fundamental analysis and are instead driven by macro considerations, are fraught with high risk of substantial absolute and relative losses.”

It is worth noting that this does not mean macroeconomics is irrelevant. That something is hard to predict is not the same as saying it has no impact. But to try and make precise predictions to the detriment of actually analysing the companies you’re investing in is not likely to end well. Perhaps more importantly, doing proper due diligence on the companies you’re investing in can often negate the negative impact a future event you’re concerned about may have.

AIE’s portfolio arguably illustrates this. The managers have developed an in-house cash flow analysis system and also spend a significant amount of time undertaking due diligence efforts on prospective investments. They also avoid companies whose success is more driven by cyclical factors, as well as those that are more at risk of being beholden to a small group of stakeholders, like a family owner.

It is still early days and we may indeed see more of an impact if we do head into an economic downturn. However, even after a period of inflation, rate hikes and perpetual uncertainty, we can see that companies in the AIE portfolio continue to perform well.

For example, Titan Co is one of the trust’s largest holdings. The company sells watches, jewellery, eyewear and clothing, via its own brands and third-party companies. Although it has begun expanding abroad, the bulk of the company’s revenue is derived from India.

In its most recent financial results, the company saw a 50% uplift in its year-on-year profit numbers during the last quarter. Significantly, the firm saw growth across the segments it operates in, although more than three-quarters of revenue comes from its jewellery business.

It’s plausible that this was driven by a desire for ‘real’ assets as inflation rises. However, Titan has seen its revenue rise every year, bar one, for the past two decades, with a compound annual growth rate of close to 20%. The most recent quarterly growth may be more pronounced but it fits with the broader trend we’ve seen drive the company’s success, namely a growing demand for discretionary consumer goods in India, where the average annual salary is now close to $5,000.

Avalon Technologies, another AIE top 10 holding, represents a similar growth story but with a different customer base. The company was founded in 1999 and manufactures components for a variety of industries, including the clean energy and communications sectors.

The company held its IPO in April and saw a 30% uplift to revenue in its most recent results but a near doubling in operating income, as the increase in sales was not offset by a commensurate increase in costs.

Unlike Titan, which is benefitting more from the growing wealth of Indians, Avalon’s success seems more driven by the move away from manufacturing in China. For example, Apple want to shift 25% of global iPhone production to India by 2025. Samsung also announced in February that it will invest over $200m to build a new refrigeration manufacturing facility in India, adding to the mobile phone facilities it already has in the country.

Is it plausible something will derail these trends and harm Avalon’s prospects? Perhaps. But for now the company, along with other AIE holdings, is still producing strong cash flows and earnings growth.

And the trust’s decision to invest in the firm was based on those types of factors, as opposed to what external forces may or may not impact it. Given that AIE delivered annualised share price total returns of over 14%, in GBP terms, since its IPO in July 2018 through to the end of May 2023, it’s probably fair to say that – at least so far – it’s a strategy that’s held up well.

As is probably clear from this article, predicting whether or not that will continue isn’t easy to do. But as the spectre of an economic downturn looms in the distance, it seems wiser to focus on finding good companies that can perform well in a downturn, rather than trying to determine exactly when that downturn might hit.

Login to read the full article...

Kepler Trust Intelligence provides research and information for professional and private investors. In order to ensure that we provide you with the right kind of content, and to ensure that the content we provide is compliant, you need to tell us what type of investor you are.

Continue

Welcome to Kepler Trust Intelligence

Please enter a valid email address
{{item.msg}}
Please enter a valid password
{{item.msg}}
Please enter a valid email address
{{item.msg}}
Please check your email. If an account exists you'll be sent instructions on how to reset your password.
To ensure that we are able to provide content which is appropriate for you, please tell us a little about yourself.
Please choose an option
{{item.msg}}
Please enter a company name
{{item.msg}}
Please enter a location name
{{item.msg}}
Please choose an option
{{item.msg}}
Please enter a platform
{{item.msg}}
Please choose an option
{{item.msg}}
Please enter a trust
{{item.msg}}
?
The information contained herein is not for distribution and does not constitute an offer to sell or the solicitation of any offer to buy any securities in the United States to or for the benefit of any United States person (being residents of the United States or partnerships or corporations organised under the laws thereof). The investment funds referred to herein have not been registered in the United States under the Investment Company Act of 1940 and units or shares of such funds are not registered in the United States under the Securities Act of 1933.
Please confirm
{{item.msg}}
Please select an option
{{item.msg}}
See benefits
A free Kepler Trust Intelligence account allows you to access premium content including the ‘Kepler View’ – our verdict on the trusts we cover – and historical research so you can see how our view has changed over time. An account also unlocks useful facilities like the ‘follow’ button which lets you keep track of the trusts you’re interested in and as a logged in user you can also download PDFs of our research, and choose the layout of the page you’re reading to suit your preference. We will not share your details unless you give us permission to do so, and we won’t bombard you with emails – we only send one a week.
Please select an option
{{item.msg}}
Please enter your first name
{{item.msg}}
Please enter your last name
{{item.msg}}
Please enter a valid email address
An account already exists with this email - have you forgotten your password?
{{item.msg}}
Please enter a valid password
{{item.msg}}
Please enter a valid password
{{item.msg}}
How will this information be used? Your answers help us to tailor our content to relevant investment trusts, and to ensure that the asset allocation and portfolio strategy research we produce is appropriate to our userbase.
Our Website uses Cookies Cookies are small text files held on your computer. They allow us to give you the best browsing experience possible and mean we can understand how you use our site. Some cookies have already been set. You can delete and block cookies, but parts of our site won’t work without them. By using our website you accept our use of cookies. For further information please refer to the Kepler Privacy Notice.
Need help?

One more thing...

Did you know, you can 'follow' individual trusts on Kepler Trust Intelligence? Use the functions below to set up alerts and we'll send you research and updates on your chosen trusts.

Suggested trusts to follow

Browse all funds
Need help?
Current Site Kepler Trust Intelligence is produced by the investment companies team at Kepler Partners and is the UK’s premier source of detailed qualitative research on investment trusts. Absolute Hedge is a market leading UCITS research database providing proprietary research on funds, themes and strategies in the UCITS space. Kepler Liquid Strategies is a Dublin domiciled UCITS fund platform featuring a number of best-of-breed fund managers. Kepler Partners is a corporate advisory and asset raising boutique specialising in the regulated funds market in Europe and investment trusts in the UK.