Ashoka India Equity 16 March 2021
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.
Ashoka India Equity Investment Trust (AIE) has been the best-performing India specialist trust since it launched in July 2018. In that time AIE has more than doubled the return of its benchmark, while its peers have each underperformed. As we discuss in the performance section, the vast majority of excess returns have come from stock selection rather than sector or market cap allocation.
The performance is built upon the stock selection of a large, dedicated team of India specialists. AIE’s investment advisor is White Oak, founded by Prashant Khemka, former CIO and lead portfolio manager for Global Emerging Markets Equity at Goldman Sachs. White Oak employs a team of ten analysts, all based in India and all focused on specific sectors. They are compensated based upon the contribution of their stock picks to returns, which incentivises them to pick only companies they think will outperform the market (see management section).
This large team – the largest employed by an Indian specialist investment trust – implements a quality growth strategy with a unique feature. This is a focus on an adjusted cash flow metric which aims to uncover those companies which can generate marginal cashflow with the least additional use of capital. As we discuss in the portfolio section, this is accompanied by a strong focus on valuation, which means the team are happy to turn over their portfolio rapidly when valuations shift.
This strong performance has led the trust’s shares to regularly trade on a premium to NAV which is 0.2% at the time of writing. Apart from the stock-selection process, key distinguishing features include the performance-fee-only charging structure designed to align the managers’ interests with those of shareholders (see charges).
AIE’s excellent performance since launch seems to be built on strong foundations. To have as many as ten analysts working on single country portfolios is unusual and should be highly beneficial to the alpha generation task. From speaking to the management team, their passion and commitment to their roles is clear. Additionally, the strategy is clear and well-defined, with a well-understood process for identifying a strong company and the right valuation. Although it is dangerous to expect past success to continue, and markets can always surprise, we think all the right building blocks are in place.
We also like the performance-fee-only structure. This means that investors do not pay a fee if the managers cannot succeed in outperforming their benchmark over a three-year period, and incentivises the team very effectively to repeat their early success. That said, the fee can be high when relative returns have been exceptional (see charges). However, it is worth remembering that NAV returns are net of the impact of accrued fees, and so far investors have been significantly better off if invested in the ‘expensive’ AIE rather than ‘cheaper’ peers.
We note emerging markets funds are increasingly dominated by China and North Asia and are unlikely to invest much in India, which is just 9% of the MSCI Emerging Markets index. As we discuss in the performance section, India is benefitting from a period of significant pro-business reforms which have increased the country’s growth potential. We think investing in the country should have strong appeal for long-term growth investors.
|The best track record amongst India specialist peers since inception
|Currently too small for many large investors (but issuing shares regularly)
|Large team of dedicated analysts can cover the whole market
|As a single-country trust, highly exposed to the politics and economy of one state
|Fee structure aligns managers’ interests with those of investors
|Performance fee can be high when earned (although overall fees will be low if it is not)