Ashoka India Equity 27 October 2021

Ashoka India Equity (AIE) is the top-performing India trust since it launched in July 2018 by some way (see Performance). The portfolio is managed by White Oak Capital Management using a process designed to extract the maximum value from stock-picking rather than top-down or macro-economic calls. All the trust’s considerable outperformance – a NAV total return of almost 100% compared to 56% for the benchmark since launch – has come from stock selection, with sector or market cap biases having no net positive effect.

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 20 analysts all 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. The first three-year performance fee period ended in June 2021.

On average, AIE has traded essentially at par since launch. Excluding the six months immediately after the pandemic hit, the norm has been a small premium, which is 2.3% as of 21/10/2021. The board have been active in issuing shares to grow the trust, and this, plus performance, means net assets have grown to £162m.

We think there are a number of reasons why a dedicated allocation to India could be appealing at this point in time. The government has implemented business-friendly reforms, which have seen India jump from 142 (out of 190 countries) in the World Bank’s Ease of Doing Business Ranking in 2014 to 63 in 2020. Reforms to the bankruptcy laws, the taxation system and an overhaul of labour laws have been implemented, while more of the Indian market has been opened to foreign investment. The pandemic has seen renewed determination from companies to diversify their supply chains away from China, and India has taken steps towards creating a manufacturing and technology ecosystem to capture market share in global trade. Meanwhile, GEM funds often offer little exposure to India – it makes up 12.2% of the MSCI EM Index.

AIE is a premium product. The striking success to date comes from stock selection as intended, with the process seeming to be validated by the early results. 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.

We strongly believe the performance-fee only structure is good for investors. It should ensure outperformance is the total focus of the team as the trust grows, removing the temptation to sit on past success and harvest fees. However, it can lead to high rewards for the manager and high OCF figures.