Results analysis: Ashoka India Equity

• Ashoka India Equity (AIE) has released its results for the year ending 30/06/2023. The trust delivered strong outperformance with NAV and share price total returns in sterling terms of 19.4% and 18.3% respectively, compared to equivalent returns of 11.8% in the trust’s benchmark, the India Investable Market Index.
• Key contributors to performance included vehicle and affordable homes lender Cholamandalam Investment and Finance, as well as ICICI Bank. Electronics manufacturing group Kaynes Technology was also a key contributor to performance.
• The managers built on an already impressive track record last year. From inception through to the period end, AIE delivered NAV total returns of 110.4% and share price total returns of 109%, both in sterling terms. That represented substantial outperformance relative to the equivalent returns of 60.9% delivered by the benchmark over the same period.
• AIE traded at a premium for the majority of the year, enabling the trust to issue new equity. The trust issued c.5.2m shares over the period, representing 4.6% of the shares in issue at the period end. New share issuance raised £10.7m for the trust over the period.
• No fees were charged over the period. AIE only charges a fee on outperformance delivered over three year periods. The next three year period will conclude at the close of the trust’s current financial year.
• AIE Chairman Andrew Watkins said: “Global inflation is easing and, war to one side, India is coping well with supply lines both in and out of the country. Growth is forecast to reach 6% this year, materially in excess of any other major economy, and is likely to continue apace into 2024-5. Your Board is frequently informed of the innovative investment possibilities presenting themselves to the Company’s management teams and, regardless of mentioned headwinds, the dynamism of Indian entrepreneurs is self-evident and undimmed.”

Kepler View

Since launching in 2018, Ashoka India Equity (AIE) has been the top performing country specialist investment trust focused on India. Last year saw the trust managers build on that impressive track record, with another period of substantial absolute and relative outperformance, something they have also continued in the short period of time since the end of June.

We think the trust offers investors one of the most closely aligned incentive structures in the closed-ended fund sector today. The managers are paid solely on outperformance they deliver over three year periods. The fee, which is 30% of any excess returns, is capped at 12% of the average net assets over those periods. Fees are also paid in shares, with half locked up for an additional three years.

This structure essentially means that the managers can only get paid if they deliver outperformance for shareholders and, to maximise their own returns, they have to do so over a six-year period, meaning there is a meaningful incentive for the managers to produce long-term returns for their shareholders.

That structure is complemented by the trust’s extensive analyst resources and the approach the team takes to markets. AIE has the largest on the ground analyst team among its Indian country specialist peers. India has a vast equity market and is more sectorally diverse than many emerging and developed markets, something we believe necessitates the wide level of expertise that AIE’s analyst team possesses.

The managers also pay careful attention to valuations and have developed their own proprietary cash flow valuation system. They also hold thousands of meetings per year and place a strong emphasis on corporate governance. This is important in any market, but we arguably saw the benefits of this approach earlier this year, as AIE held none of the companies that were hit by a scandal involving the Adani Group.

Combined, we think these factors make AIE an attractive way to access the Indian equity market. As one manager at another trust noted at Kepler’s emerging markets event in June of this year, he has never been so upbeat about India as he is today.

We believe that is warranted. Indian GDP growth continues to be strong. The country is benefitting from firms moving manufacturing away from China, as well as the government’s ‘Made in India’ which is designed to foster exactly those sorts of developments. In absolute terms, India produces more STEM graduates than any country on earth and the country’s burgeoning technology industry can be seen clearly in the AIE portfolio.

The trust’s track record is not a guarantee of future returns. However, we think anyone looking to take an active approach to investing in India is likely to find the trust’s aligned fee structure and the strength of its analyst team appealing.

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