Aberdeen New India 03 March 2023

Aberdeen New India’s (ANII) managers, Kristy Fong and James Thom, take a highly-active approach to investing in India. Company and sector allocations can have large deviations from the benchmark, in order to attempt to generate alpha. Kristy and James are bottom-up stock pickers and select companies through a fundamentals-based assessment, looking for those stocks which offer strong long-term growth prospects, whilst placing a strong emphasis on ESG issues.

One of the important drivers of portfolio performance has been the team’s avoidance of investing in the Adani group of companies, as well as Reliance Industries, the largest listed company in India. In the team’s view, the Adani companies pose many ESG risks, in particular the excess leverage they carry and the quality of their accounting, while Reliance Industries’ treatment of minority shareholders is problematic. Not owning either group of companies, both of which have performed strongly in recent years, has contributed to the portfolio’s underperformance over the medium term (see Performance section). However, we would argue that the recent publication of a damning report on Adani may vindicate the team’s view and portfolio positioning.

2023 has started off relatively weak for India, as China’s reopening diverts some global investors’ attention. However, the team believe that India should remain as the fastest-growing major economy, at least over the short to medium term. They believe in the numerous long-term structural drivers of growth, such as rising incomes and consumerisation, and have taken overweight exposures to sectors likely to benefit, such as financials and healthcare.

ANII trades at a wide discount and the board has been active in buying back shares at around the 20% level (see Discount section). Given ANII’s growth objective, it does not pay a dividend and the managers use a modest level of gearing of approximately 10%. Its latest OCF is 1.06%.

We share the team’s optimism about India, a country with a vast and growing market supported by several long-term structural tailwinds, such as a growing population with rising incomes and business-friendly tax and legal reforms. Also, as multinationals look to mitigate political risks associated with China by relocating plants elsewhere, it presents India with huge opportunities to attract inward investment, given its skilled and low-cost labour force.

The poor outcome for investors in the Adani companies highlights the importance of a strong focus on corporate governance in India, which has long been a strength of the abrdn team. We think it adds to the attractions of an investment in ANII and avoiding the blow-up reflects well on the team, even if a lack of exposure has led the portfolio to lag in the past.

ANII’s performance has fallen short of the MSCI India Index over the last 2 years. The lack of exposure to Adani and Reliance have been key reasons, but the market’s rotation towards value stocks has also hurt relative returns. We believe the quality tilt of the portfolio should make it more resilient in down markets and serve investors well over the long term, through its growth focus. However, the team acknowledge the performance shortfall and are taking measures to improve it going forward. These include exiting low-conviction stocks and adding to quality names that have sold off, as well as increasing the portfolio’s resilience to inflation.