Ashoka WhiteOak Emerging Markets 30 September 2024
Disclaimer
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Ashoka WhiteOak Emerging Markets. 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 WhiteOak Emerging Markets (AWEM) launched in May 2023 in recognition of the investment opportunities in emerging markets, identified by the trust’s manager, WhiteOak Capital, and founder Prashant Khemka. AWEM provides access to a multi-cap portfolio of emerging market equities, with a focus on small- and mid-cap opportunities, which remain largely under-researched.
The WhiteOak team have had huge success with Ashoka India Equity (AIE), the top-performing India trust since it launched in 2018, which has regularly issued shares to meet investor demand. Like AIE, AWEM employs a performance-first culture, designed to maximise alpha through stock selection, whilst minimising volatility. The trust’s fee aligns with this objective, charging no management fee but a performance fee earned only if the portfolio demonstrates relative outperformance of its benchmark over discrete three-year periods, incentivising the team to remain focussed on delivering alpha through stock selection.
WhiteOak’s large analyst team cover a wide universe of stocks, filtering for high-quality businesses at attractive valuations. These are selected for their ability to deliver superior returns, scalable business models, sustainable competitive advantages and good governance. The team utilise their unique analytical framework, OpcoFinco, to assess each company’s valuation, distinguishing between truly high-quality businesses and those whose current returns may not be sustainable without substantial future capital injections (see Portfolio).
Since launch AWEM has delivered strong Performance, with stock selection within small- and mid-cap stocks playing a significant role in it outperforming the index, alongside off-benchmark positions, like Disco Corporation. The trust currently trades on a small 2.0% Discount, although the board has several tools at its disposal to control the discount, notably an annual redemption facility, which should also reassure shareholders in respect to any liquidity concerns.
Prashant and his team believe emerging markets are currently ripe with opportunities, propelled by long-term structural drivers and historically low valuations. They argue many of these markets are under-researched, often harbouring alpha-rich companies yet to be fully recognised by investors. We believe AWEM is a standout option for capitalising on these opportunities, managed by an experienced team with deep knowledge of both developed and developing markets.
AWEM benefits from a differentiated investment approach, including its unique valuation framework, which has seen the team add value through stock selection in under-researched areas during the trust’s first year. Additionally, AWEM’s Charges structure is particularly compelling, as analysts are compensated predominantly based on an attribution analysis of their sectors’ contribution to performance. There is also no standard management fee – only a performance fee linked to relative outperformance of the benchmark, paid in AWEM shares. We think this structure aligns the interests of the team with that of shareholders and the ongoing success of the trust.
Given that AWEM is still relatively new, with just a 17-month track record, we think it’s reasonable some investors may need more time to gain confidence in the team and strategy. However, both have a history of success, notably in managing AIE, a sector-leading Indian fund, which launched at a market cap of £47m and has grown to c. £460m, and Prashant’s previous track record at Goldman Sachs.
In May 2024, AWEM’s board proposed to Asia Dragon that the two trusts should combine, and shortly after, Asia Dragon initiated a full strategic review. If the merger were to occur, it could result in reduced charges, increased liquidity and broader investor appeal (see Discount). Overall, with AWEM’s differentiated process, unique charging structure, large research team and recent strong performance, we think it’s a compelling option for investors seeking exposure to emerging markets.
Bull
- A well-resourced team with expertise of investing across global markets is an advantage with stock selection
- Fee structure aligns managers’ interests with those of investors
- Emerging market valuations look attractive versus developed markets
Bear
- Small size of trust currently, mean that charges are relatively high
- A few members, not the entire team, have a track record of managing a broader emerging market equity strategy
- Greater exposure to small- and mid-caps may pose as a headwind when large-caps outperform