Aberdeen New India 28 July 2021

Aberdeen New India (ANII) owns a portfolio of high-quality Indian equities chosen for their strong balance sheets, sustainable earnings and good governance. These characteristics have helped it outperform its peers over the long run by, amongst other things, delivering relative outperformance in periods when the market falls (see Performance).

ANII is managed by Kristy Fong and James Thom of the ASI Asian Equities Team. While their portfolio is typically more expensive than the market, they look for opportunities where they think future growth is being undervalued, aiming to add alpha by being longer-term in their thinking. Their own valuation of a company is critical in defining acceptable entry and exit prices, on which they tend to be disciplined. As a result, the portfolio is fairly well spread across sectors and styles – this is neither a growth nor value proposition. During the pandemic, the exposure to new economy businesses has risen thanks to the opportunities being thrown up by volatile markets. We expect the portfolio to continue to see a better spread of old and new economy sectors (see Portfolio).

Stock selection is built on the detailed bottom-up analysis of the large team of analysts and portfolio managers based in Asia. They look for companies with a position of market leadership which should allow them to grow faster than peers over the long run. The team view strong corporate governance as an important characteristic of a quality company (see ESG), and it is a key issue in determining whether they invest.

Kristy and James use gearing tactically, and are currently running net gearing of c. 7%, indicating cautious optimism. ANII’s shares currently trade 13.6% below NAV, slightly wider than their five-year average.

We think the long-term fundamentals are pretty exciting for India. Speaking to Asia fund managers, it is striking that India repeatedly comes up as an opportunity. Its demographics are stronger than China, its labour is cheaper than China, and it is winning business from multinationals concerned about exposure to China. The reforms implemented by the Modi government have also had a real impact. India has been one of the top ten improvers in the World Bank’s Ease of Doing Business Rankings for three consecutive years.

That said, we may be entering a more difficult period for the global economy now that optimism on the vaccine rollout has potentially moderated. With the pandemic far from over and with government support schemes winding down, we think the pressures on individual companies will be significant. For investors wanting exposure to India, this could be a good environment to have exposure to high quality companies via a strategy such as ANII. A focus on quality has meant the trust has lagged in 2021 to date, but we think quality characteristics may soon be in high demand as the strongest companies prove able to weather tough times and steal market share. Kristy and James think the outlook is very good over the next two to three years, but recognise there are potential stumbling blocks for Indian equities along the way.

ANII’s discount of 13.6% is wide in absolute terms but close to its five-year average. However, India has rarely been in favour during this period. While we recognise single country trusts may deserve a slightly wider discount than more diversified ones, we think this could prove to be a good entry point if our optimism about India’s future proves to be justified.