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.
 
AIE still best in its class, but now on a discount…

 

Overview

Ashoka India Equity (AIE) is the standout performer amongst its peer group with a NAV return of 83.8% since it launched in July 2018 (see Performance). The portfolio is managed by White Oak Capital Management, using a process designed to extract maximum value from stock-picking rather than top-down or macro-economic calls. Market cap or sector biases made no contribution to returns; almost all of the outperformance is attributable to stock selection.

The strategy implemented by White Oak was designed by its founder Prashant Khemka, former CIO and lead portfolio manager for Global Emerging Markets Equity at Goldman Sachs. The process uses a bespoke cash-flow analysis framework to identify great businesses at attractive valuations (see Portfolio). Alongside the investment process, a key feature is the thought that has gone into ensuring the alignment of interests of analysts and shareholders. The broad team – which has grown to over 20 analysts devoted to India – are compensated based on the contribution of their stock selections to the portfolio’s returns. In turn, AIE only pays the manager a fee if the trust outperforms the benchmark – there is no management fee excluding this performance fee (see Charges). This is designed to ensure the team remains incentivised to outperform even as the trust grows.

Since launch, AIE has mostly traded at or above par. It is only during periods of greater market volatility, such as immediately after the pandemic hit or more recently, that it has traded at a meaningful discount. AIE has so far always traded at a significant premium in comparison to its direct peers. This has given the board frequent opportunities to issue new shares and, along with the portfolio’s underlying performance, AIE’s assets under management has grown to around £180m.
 

Analyst’s View

 
We think there are a number of reasons why an India dedicated allocation could be appealing at this point in time. The country has a young and educated workforce, offering it scope to transition towards more sophisticated manufacturing and services industries. Rising geopolitical tensions makes India a likely beneficiary for foreign investment. The pandemic has already seen a renewed determination from companies to diversify supply chains away from China. The Indian government has implemented business-friendly reforms, including reforms to the bankruptcy laws, an overhaul of labour laws and the taxation system, while more sections of the Indian market have been opened to foreign investment.

We view AIE as a premium product. The striking success to date comes from stock selection as intended, with the process having been validated by the results so far. The consistency of the approach and the alignment of incentives between manager and shareholder should give cause for optimism that this pattern of outperformance can continue.

In our view, the performance-fee only structure should ensure outperformance is the total focus of the team. However, it can lead to high rewards for the manager and high OCF figures. Global Emerging Market funds often offer little exposure to India so, for investors looking for a more direct approach, we believe AIE should feature at the top of their list of options. The current discount may offer a rare opportunity.
 

Bull

 

  • The best track record amongst India specialist peers since inception
  • Large team of dedicated analysts covering the whole market
  • Fee structure aligns managers’ interests with those of investors
 

Bear

 

  • As a single-country trust, highly exposed to the politics and economy of one state
  • A high conviction portfolio, bad stock picks can have a greater impact on the portfolio
  • Performance fee can be high when earned (although overall fees will be low if it is not)

 

 
See the latest research on AIE here >
 
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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.”

 

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