Results analysis: Ashoka India Equity

• Ashoka India Equity (AIE) has released its half-year results for the period ending 31/12/2022. The trust delivered NAV total returns of 10.0% and share price total returns of 9.7%, compared to a 9.9% total return in the MSCI India IMI Index, the trust’s benchmark. This was all in GBP terms.
• That small level of NAV outperformance builds on the trust’s already strong track record. From launch until the end of 2022, the trust delivered NAV total returns of 93.0% in GBP terms. This represented outperformance of 45.8% relative to the benchmark, which produced total returns of 47.2% over the same period, also in GBP terms.
• Contributors to the trust’s performance in the period include banking group ICICI Bank, luxury goods business Titan, and the non-bank lending company Cholamandalam Investment and Finance.
• AIE traded at a premium for much of the half-year period, allowing the board to raise a gross amount of £10.4m via the issuance of 5.08m shares. The former figure represented 4.8% of the trust’s NAV at period end.
• AIE charges no management fees, with the managers only receiving performance fees, capped at 30% of outperformance, over three-year periods. The end of the next period will be 01/07/2024.
• AIE Chairman Andrew Watkins noted that the managers “remain focused on delivering outstanding returns from a diversified portfolio of investments from across the market cap spectrum. The board has great confidence in their abilities to outperform and produce superior returns from one of the world’s most dynamic and fastest-growing markets.”

Kepler View

Ashoka India Equity (AIE) has built an impressive track record since its launch in 2018. The managers are free to invest across the market cap spectrum and place a heavy emphasis on corporate governance. Along with a proprietary valuation system and a large research team, the managers believe these factors are key to delivering outperformance.

Indian companies escaped much of the volatility that markets experienced in 2022. Inflation has been lower than in most of the developed world and the country was more immune to the fallout from Russia’s invasion of Ukraine. However, revelations about alleged fraudulent behaviour from the Adani group of companies in the new year led to a decline in valuations across the board.

We think it’s to the managers’ credit that they held none of the companies that were discussed in the short seller report which sparked the turmoil around Adani. The managers have always emphasised corporate governance as being one of the cornerstones of their investment process and the events of 2023 have validated their process in that sphere.

It’s plausible that the Adani affair will continue to cast a pall over Indian equities in the near term. Beyond the fact that corporate malfeasance can occur anywhere, this should not detract from some of the long-term tailwinds that look to work in India’s favour in the future.

Unlike China, which has an increasingly elderly – and now shrinking – population, India has a young, growing population that can stoke growth in the years ahead. Manufacturing is also moving to the country, partly because of costs but also due to tensions between the US and China. Significantly, AIE’s managers note that even low single digit gains in market share by India can lead to double-digit growth for individual companies.  

Earnings growth for companies in the country remains strong, with investment bank Goldman Sachs estimating that earnings will increase by 17% in 2023 – ahead of China and the wider APAC region. The International Monetary Fund has also estimated that the Indian economy will grow, in real terms, by 6.1% this year, ahead of both the US and China.

We think AIE offers an attractive means by which to access these opportunities. In particular, the managers have argued that the small and mid-size segment of the Indian stock market offers significant opportunities for outperformance, due to its size and the lack of meaningful analyst coverage.

The trust’s fee structure is also likely to appeal to investors, with the managers only receiving a percentage of outperformance over discrete three-year periods. Performance fees are paid in shares, half of which are locked in for a further three years. The result is that managers are strongly incentivised to deliver long-term performance and shareholders have one of the lowest ongoing charges in the closed-ended fund sector.

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