Ashoka India Equity 09 June 2022

Ashoka India Equity (AIE) is the standout performer amongst its peer group with a NAV return of 83.8% since it launched in July 2018 (see Performance). The portfolio is managed by White Oak Capital Management, using a process designed to extract maximum value from stock-picking rather than top-down or macro-economic calls. Market cap or sector biases made no contribution to returns; almost all of the outperformance is attributable to stock selection.

The strategy implemented by White Oak was designed by its founder Prashant Khemka, former CIO and lead portfolio manager for Global Emerging Markets Equity at Goldman Sachs. The process uses a bespoke cash-flow analysis framework to identify great businesses at attractive valuations (see Portfolio). Alongside the investment process, a key feature is the thought that has gone into ensuring the alignment of interests of analysts and shareholders. The broad team – which has grown to over 20 analysts devoted to India – are compensated based on the contribution of their stock selections to the portfolio’s returns. In turn, AIE only pays the manager a fee if the trust outperforms the benchmark – there is no management fee excluding this performance fee (see Charges). This is designed to ensure the team remains incentivised to outperform even as the trust grows.

Since launch, AIE has mostly traded at or above par. It is only during periods of greater market volatility, such as immediately after the pandemic hit or more recently, that it has traded at a meaningful discount. AIE has so far always traded at a significant premium in comparison to its direct peers. This has given the board frequent opportunities to issue new shares and, along with the portfolio’s underlying performance, AIE’s assets under management has grown to around £180m.

We think there are a number of reasons why an India dedicated allocation could be appealing at this point in time. The country has a young and educated workforce, offering it scope to transition towards more sophisticated manufacturing and services industries. Rising geopolitical tensions makes India a likely beneficiary for foreign investment. The pandemic has already seen a renewed determination from companies to diversify supply chains away from China. The Indian government has implemented business-friendly reforms, including reforms to the bankruptcy laws, an overhaul of labour laws and the taxation system, while more sections of the Indian market have been opened to foreign investment.

We view AIE as a premium product. The striking success to date comes from stock selection as intended, with the process having been validated by the results so far. The consistency of the approach and the alignment of incentives between manager and shareholder should give cause for optimism that this pattern of outperformance can continue.

In our view, the performance-fee only structure should ensure outperformance is the total focus of the team. However, it can lead to high rewards for the manager and high OCF figures. Global Emerging Market funds often offer little exposure to India so, for investors looking for a more direct approach, we believe AIE should feature at the top of their list of options. The current discount may offer a rare opportunity.