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Thomas McMahon
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Updated 30 Sep 2021
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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 (AIE) has reported strong results for the year ending 30 June 2021. Excellent returns from the Indian market have been supplemented by significant alpha. AIE’s NAV total return was 52.6% compared to a 45.2% total return for the MSCI India IMI Index. AIE’s share price total return was 65% as the shares moved from a 5.4% discount to a 2.3% premium. As of 28/09/2021 the premium was 2.1% (Source: JPM Cazenove).

  • The managers report that while Indian GDP fell by 7.5% over FY 2021, earnings growth for the NIFTY 50 benchmark of the largest Indian stocks was the highest it has been for a decade at 14%. While India suffered a severe second wave of coronavirus infections during the period, the stock market was relatively unaffected.

  • Amongst AIE’s most successful stock picks during the period were Coforge and Infosys. Coforge is a fast growing mid-cap IT services company with a strong niche in insurance and travel technology, while Infosys is a global giant in the same industry and one of India’s largest companies.

  • While these are well-established companies, the managers report a thriving IPO scene which includes a number of early stage tech opportunities, such as recent listing Zomato, the food delivery company. Many more technology-enabled, new-age companies are expected to IPO in the coming months, and AIE’s manager is looking to find future ‘digital disruptors’.

  • AIE has a performance fee only structure i.e. it doesn’t charge any fixed management fee. Also, the performance fee is charged only once every three years. Due to exceptional performance over the past three years, the cumulative performance fee was 5.26% of the average net assets over 2021. The fee is paid in shares and NAV returns reported are net of this fee.

  • In considering the long-term outlook for the trust, the chairman reports: “As the world emerges from the worst effects of COVID-19, India’s economy is well placed to benefit with a young, adaptable workforce and market reforms that should enable it to continue a robust trend of economic growth.”

Kepler View

This is another strong set of results for Ashoka India Equity (AIE). Over the past three years the trust has now more than doubled the NAV total returns of each of the three other Indian specialist trusts (Source: JPMorgan Cazenove, data to 27/09/2021), with sterling NAV total returns of 110%. The performance fee reported is certainly high, but we would remind investors that the NAV returns are net of this fee, and so despite the higher total charges, investors would have been much better off if they had invested in AIE rather than its cheaper peers. It is also important that these fees are not incurred on an ongoing basis: if AIE underperforms in future the manager will receive no fee at all, as the performance fee is their only compensation. We like this structure as it incentivizes outperformance, which the managers have certainly delivered.

AIE has an innovative investment strategy as well as fee structure. The aim is to outperform through stock selection rather than macro-economic analysis, and fundamental research is based on the proprietary OpcoFinco framework of discounted economic cash-flow analysis. In essence this framework isolates recurring cash returns in excess of the cost of capital deployed in the business in the forms of fixed assets and working capital, in order to give unique insights into the business’s true economic cash-flow-generation characteristics which are not captured by traditional valuation metrics. This is intended to flush out businesses which may look optically attractive on traditional accounting metrics but in reality may have very poor economic characteristics . All analysts are expected to use this framework, and are assigned sectors to cover, being compensated on their contributions to client portfolios in these sectors, another example of the alignment of interests and incentives being engineered to improve shareholder returns.

AIE has grown from just £70.5m of net assets to £136.6m over the course of the 2021 financial year, with roughly £26m of inflows supplementing the strong performance. The trust has traded on a premium for most of the period, with the board able to regularly issue shares as a result. For some managers the incentives to outperform falls as their portfolios grow, as they are paid an ad valorem fixed fee on NAV. AIE’s performance fee only structure should in theory assure the managers remain incentivised to repeat their success.

In our view this is an exciting time to be investing in India. Modi has made a number of business-friendly reforms which seem to be bearing fruit. Meanwhile companies’ and countries’ determination to reduce their reliance on Chinese supply chains has seen the country attract investment and take steps towards creating a technology ecosystem. We believe both factors are likely behind the growing numbers of early-stage companies reported by the manager in the annual report. AIE has the ability to invest up to 10% in unlisted equities, which could prove useful in the future.

Looking out long-term, India’s demographics are favourable, with a young and growing population, in contrast to China where the working age population is shrinking as a proportion of the total population. India also lacks the extreme regulatory risk which we have seen take effect in China in recent months. In our view AIE is an outstanding way to benefit from this potential via an active manager with an excellent track record and well-aligned incentive structure.

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