Heads we win, tails we lose: Ashoka India Equity
This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.
Ashoka India Equity’s unique structure means it is strongly aligned with shareholder interests…
“Beware of the person who gives advice, telling you that a certain action on your part is ‘good for you’ while it is also good for him, while the harm to you doesn’t directly affect him,” writes Nassim Taleb in his book Skin in the Game.
Few lines could better capture one of the perennial problems found in the world of investing. Someone managing a fund wants you to invest in it. You both benefit if it goes up. But if the opposite happens, the fund manager is still going to get paid, even though you’ve lost money.
It’s a problem with no good solution. Even fund managers need to get paid at the end of the month. They are also providing a service. Managing an investment portfolio isn’t a quick or easy process, so it makes sense that we pay them to do so – just as we pay almost anyone else that provides us with a service or product.
And yet that doesn’t mean there shouldn’t be a balance between the needs and interests of investors and the people managing their money.
Some investment trusts try to do this by scrapping performance fees or making it tougher to hit the targets needed to receive them. Alternatively a trust’s board might simply work out an agreement to cut management fees.
Changing the dynamic
These are all positives but they’re arguably just a way of reducing the negative impact that the dynamic described above has, rather than changing it.
All is not lost, however, as there are fund managers out there taking a different approach to try and balance their interests with their investors’.
One of them is White Oak Capital, which manages Ashoka India Equity (AIE). Launched in 2017, the asset management group was founded by Prashant Khemka, CIO and lead PM of both Goldman Sachs India since March 2007 and Global Emerging Markets Equity since June 2013.
AIE was set up by Khemka’s team in July 2018. From its launch until the end of February 2022, the trust has been the best performing closed-ended fund in its peer group. It has been remarkably consistent in doing so too. Not only are its total returns superior over the period since its IPO, but it was the best-performer on an annual basis every year since launch.
In fact, from the start of 2022 to the end of February is one of the only periods where the trust has underperformed. Even then, in that period, both its benchmark index, the MSCI India IMI, and its peers in the space have all delivered negative returns.
No management fee
There are likely numerous reasons for the trust’s success. It has a strong team of equity analysts with boots on the ground in India, who carry out more than 3,000 meetings per year. White Oak focuses on a cash flow centric valuation approach to analyse prospective investments.
AIE is also structured in such a way that arguably optimises the fine balance between shareholder interests and the fund manager’s need to make money. On the most basic level, it has a discount control mechanism that allows investors to redeem their shares at net asset value (NAV) once a year.
More notably, White Oak does not charge any management fees for running AIE. That may seem like a typo but it’s not. Day-to-day expenses are paid for by fees levied on White Oak’s other funds and the asset manager only takes a fee if AIE delivers outperformance. Currently that translates into a 30% performance fee on any alpha (performance in excess of the benchmark) the trust delivers in NAV terms.
Significantly, from the shareholder’s point of view, outperformance is measured on a three year-long basis. That means any outperformance is more likely to be the result of White Oak’s analysts, rather than some sort of short-term fluke derived from favourable market conditions.
Long-term lock in
A couple of other features may make this set up even more attractive for shareholders. For one, the trust pays its performance fee in AIE shares. Half of those shares then have a lock-up period of three years.
That means, to really enjoy the fruits of their labour, the trust team has to deliver returns over a six-year period. There is also no requirement to sell and White Oak has not sold any of the shares it received in performance fees, a sign the managers believe in the trust’s long-term prospects.
To top this off, individual analysts working on the trust’s portfolio are paid according to their contribution to the trust’s performance. The more an analyst’s picks improve the trust’s track record, the better their compensation from White Oak.
As with any investment trust, AIE’s set up isn’t perfect and it’s not going to protect investors from losses and Indian equities can be volatile, particularly at a time like this when geopolitical risks are high and the traces of the pandemic linger on. But it is a unique attempt to find a middle ground which works for both investors and fund managers, and perhaps the only trust on the market today that won’t charge you anything if there is no outperformance.
Whether or not that will ensure the trust delivers outperformance is impossible to say but it’s a process that has worked for investors and White Oak so far, and it may appeal to those looking for options in what is an exciting part of the world for growth investors.
See the latest research on AIE here >
Ashoka India Equity | Slides & Audio
Joining us from Mumbai, our first speaker was White Oak Capital founder and former Goldman Sachs India CIO Prashant Khemka, who leads the management team behind Ashoka India Equity (AIE) – the top performing Indian trust since it was launched in 2018.
He described India’s ‘once in an era’ transformation from a closed, centrally planned economy to a free market model, with strong domestically driven growth and supportive demographics. He also talked about the security which investors in India – with its independent central bank and solid corporate infrastructure – can enjoy, drawing a clear comparison with China’s market interference.
“The most important thing left behind by the British, besides the English language and the railway system, is the rule of common law which is very important not only for citizens of the country but also for investors in the country. It is very difficult for the Government to confiscate property that contractually belongs to others – which is not necessarily the case in other emerging markets which have more authoritarian regimes.”
Prashant said the opportunity for investors with boots on the ground in the country was clear.
“The most compelling reason to invest in India is, has always been, and continues to be the alpha which can be generated there. India is one of the few markets where, if you do it right, you can generate more performance via alpha than via the underlying market itself.”