Foreword
By Annabel Brodie-Smith
Yesterday was the first day of India’s election, where a mind-boggling 900 million voters will go to the polls for the largest election in the world.
I have to admit India is a very special country for me as I went there for my honeymoon nearly fourteen years ago. The sights, smells and colours will stay with me forever. And then there’s my favourite city, Fatehpur Sikri, which was founded as the capital of the Mughal Empire in 1571 by Emperor Akbar, abandoned and then rediscovered Indiana Jones-style by Lord Curzon.
But enough of the romance, with the election under way it’s time to analyse India’s opportunities and outlook as well as looking at the investment companies with the highest exposure to India. Our managers consider the election’s impact, with momentum currently with Modi, but volatility expected along the way. The election itself is important as Ashoka India Equity’s Prashant Khemka explains: “The fact that India is a long-established and well-functioning democracy makes it a superior investment destination among emerging markets.”
Managers are positive about the long-term outlook for India, seeing opportunities in private sector banks, building materials and India’s thriving IT sector. David Cornell of India Capital Growth sums it up: “Even with short-term uncertainty surrounding the election, India has built a strong case as a standalone investment destination.”
The recent launch of David Attenborough’s ‘Our Planet’ programme on Netflix has yet again bought home the vulnerability of the environment. We have looked at a diverse range of investment companies that are increasingly incorporating Environmental, Social and Governance investment criteria, known as ESG, into their strategies. Interestingly, following on from India, emerging markets feature again with Mark Mobius, manager of Mobius Investment Trust explaining: “We work with companies on a range of material factors, from helping to improve investor relations to suggesting enhancements to decrease water usage or lower employee turnover.”
This month’s column from our investment guru, Ian Cowie, is a must-read on the three most important things he’s learned from his experience of investment. I particularly like his third lesson – “Let time do the heavy lifting.” Interestingly, Ian’s longest-held investment is the Indian investment trust JPMorgan Indian, but you’ll have to read the article to find out which was his best performer. Finally, this week we have launched Income Finder, a new set of tools and resources to help income seekers research and analyse investment companies. You can build a virtual portfolio of income-paying investment companies, track the dividend dates and see how much income you could receive over a year. There‘s a dividend diary which shows investment companies' dividend payment dates, plus a glossary and guides section which provides videos, articles and jargonbusters. We think Income Finder will help you plan your portfolio to suit your income needs and we look forward to hearing your thoughts on this new resource.
I’d like to wish you a Happy Easter and hope the Easter Bunny is generous.
Annabel Brodie-Smith
Communications Director, AIC
Poll position
Investment company managers explore India’s prospects ahead of its general election
The Indian general election is under way and an estimated 900 million voters will go to the polls for the largest general election in the world. With a population of 1.3 billion and a growing middle class there are many reasons to be optimistic about the prospects for India. How are investment company managers viewing opportunities in the country ahead of the general election?
The AIC has spoken to the managers of India-focused investment companies about the impact of the election, which Indian sectors present attractive opportunities, what makes India unique amongst emerging markets and the outlook for India.
General election – momentum for Modi but volatility expected
Rukhshad Shroff, Fund Manager of JPMorgan Indian Investment Trust, said: “As India’s rambunctious electorate gears up to participate in what, famously, is the world’s largest general election, investors will be expecting a degree of volatility within India’s equity market in the coming months. In terms of external factors, India is one of the Asian countries least exposed to trade friction between China and the US. So, while Indian equities can be affected by jitters in the global economy, earnings are substantially shielded from this type of nervousness. Indian revenues and earnings are instead much more affected by domestic factors, like the forthcoming election. However, investors will have the opportunity to remind themselves that the best companies often gain market share in challenging environments.”
David Cornell, Chief Investment Officer of Ocean Dial Asset Management, the Manager of India Capital Growth, said: “Despite recent polls showing a rally in support for Narendra Modi’s Bharatiya Janata Party, predicting the outcome of Indian elections is a challenging task. Whilst victory for Modi would boost sentiment, the government’s structural reforms are unlikely to be reversed should he fail to be re-elected. The Insolvency and Bankruptcy Code, Goods and Services Tax, and the Real Estate Regulation and Development Act, are his headline achievements and will be instrumental in taking the country’s economic development to the next level. Nevertheless, incremental reforms will be hamstrung if neither main party polls strongly in May, thereby leading to the formation of a fractured coalition of disparate regional parties.”
Kristy Fong, Manager of Aberdeen New India Investment Trust, said: “Latest opinion polls appear to signal growing momentum for a Modi victory. This would mean a continuation of his structural reform agenda which would be positive for markets, but elections are rarely smooth so we anticipate volatility. Market weakness based on noise, not fundamentals, will enable us to invest in good-quality companies at more favourable prices. We prefer sticking to what we know best – finding and investing in companies with pricing power and robust balance sheets which are well run.”
"However, investors will have the opportunity to remind themselves that the best companies often gain market share in challenging environments."
Rukhshad Shroff, Fund Manager of JPMorgan Indian Investment Trust
Attractive opportunities – private sector banks, building materials and IT
Kristy Fong, Manager of Aberdeen New India Investment Trust, said: “We see a huge opportunity to invest in companies that sell to Indian consumers. Infrastructure development and affordable housing, combined with tax and interest rate cuts, would also benefit real estate and materials companies. We also like private sector banks, which are better capitalised than public sector peers and less burdened by bad loans. More generally, India has fostered strong IT and engineering skills, which feeds well into the digitalisation trend we see globally.”
David Cornell, Chief Investment Officer of Ocean Dial Asset Management, the Manager of India Capital Growth, said: “As the government is under pressure to increase expenditure on infrastructure, we have seen some exciting opportunities in cement and industrials. Companies operating in these areas offer stronger balance sheets than are often found when investing directly into infrastructure and will continue to benefit as improvements are made to India’s networks and housing. Private sector banks also form an important part of our portfolio. Better pricing power has put them in a strong position whilst public sector banks have felt the squeeze as deposit growth lags behind credit growth.”
Rukhshad Shroff, Fund Manager of JPMorgan Indian Investment Trust, said: “We seek to invest in companies which have good long-term growth prospects and management teams that combine a strong ability to execute with robust corporate governance. For example, we’ve had a long-term overweight position in private sector banks. The market for financial products is growing and the private sector is gaining share at the expense of public sector banks, which are less well managed and less well capitalised. That said, an important and positive development is the long-awaited repair in the banking sector which is now well and truly under way.”
What makes India unique amongst emerging markets?
Prashant Khemka, Founder of White Oak Capital Management, the Investment Adviser to Ashoka India Equity, said: “Distinct from the fact that the Indian equity market offers a rich underlying business mix, the fact that India is a long-established and well-functioning democracy makes it a superior investment destination among emerging markets. As in developed markets, India’s mature democratic institutions and rule of law grant meaningful rights to even foreign minority shareholders. These shareholders have the right to sue government organisations whenever they are on the wrong side of the law – something no investor may dare think of in most authoritarian emerging markets.”
David Cornell, Chief Investment Officer of Ocean Dial Asset Management, the Manager of India Capital Growth, said: “India has a large population with a low dependency ratio, but key to maintaining growth will be cultivating skilled labour. Recently it has welcomed a reverse ‘brain drain’ as young professionals educated or working abroad are moving back home. Management is also very strong, demonstrated by the US’s Fortune 500 where, of 75 foreign CEOs, 10 are from India, far exceeding other emerging markets. This is reflected in the performance of India’s domestic institutions, with three of its business schools now ranked amongst the top 50 in the world.
"Most importantly, this journey is reflected in the Indian equity market which has compounded in US dollars at 12.8% over the last 10 years, compared with 3.1% in China and 2.8% in Mexico."
David Cornell, Chief Investment Officer of Ocean Dial Asset Management, the Manager of India Capital Growth
“Most importantly, this journey is reflected in the Indian equity market which has compounded in US dollars at 12.8% over the last 10 years, compared with 3.1% in China and 2.8% in Mexico. Over longer periods its returns are equally strong, demonstrating its ability to perform well irrespective of the political environment. Beyond the size of the opportunity, this superior performance is in part driven by the country offering numerous high-quality investment opportunities across a broader range of sectors in comparison to its emerging market peer group. It is a stock picker’s paradise and our outlook is turning increasingly positive. A volatile 2018 saw valuations in small and mid-cap stocks return to more reasonable levels and an earnings recovery is on the horizon. Global macroeconomic uncertainty and election noise will continue to open up attractively priced opportunities for patient long-term investors who are finding it increasingly difficult to ignore India.”
"...the fact that India is a long-established and well-functioning democracy makes it a superior investment destination among emerging markets."
Prashant Khemka, Founder of White Oak Capital Management, the Investment Adviser to Ashoka India Equity
Outlook for India: earnings growth expected to “catapult”
Kristy Fong, Manager of Aberdeen New India Investment Trust, said: “India’s large, domestic economy is in a good position to withstand external shocks. Consumption growth remains compelling, underpinned by a young population and an expanding middle class. Companies with pricing power and robust balance sheets will be well placed to prosper, such as Hindustan Unilever. We are confident in our holdings, which are all quality companies with solid fundamentals run by experienced management teams.”
Prashant Khemka, Founder of White Oak Capital Management, the Investment Adviser to Ashoka India Equity, said: “With India’s earnings growth expected to catapult 20%, the Indian stock market offers many attractive investment opportunities in our view. We continue to find well-managed, scalable businesses offering superior returns on capital at appealing valuations.”
Rukhshad Shroff, Fund Manager of JPMorgan Indian Investment Trust, said: “The growth potential remains strong in India for banking and consumer products as Indians accumulate more wealth and more spending power. The question is how to benefit from this. India is notable for having a number of very high-quality private sector listed companies which will be able to capitalise on these trends. Long-term investors know that the opportunity in India is a very compelling one. In a growth market like India, companies which may appear expensive at first can justify those valuations over time as earnings increase rapidly. That said we are, of course, extremely discerning stock pickers.”
David Cornell, Chief Investment Officer of Ocean Dial Asset Management, the Manager of India Capital Growth, said: “Even with short-term uncertainty surrounding the election, India has built a strong case as a standalone investment destination. It is the fastest growing major economy, with GDP set to double every six years, whilst the implementation of an inflation-targeting regime in 2013 has helped inflation levels structurally fall. India’s five-year inflation average is below the emerging market average for the same period.”
Investment companies with the highest exposure to India. Source: AIC/Morningstar.
Go green
Investment companies reveal how they incorporate ESG into their strategies
The growing popularity of investment strategies incorporating ESG (environmental, social and governance) criteria is one of investment’s biggest trends. More investors want their money to be invested in a sustainable way or in a way that makes a positive impact.
Investment companies in the Environmental and Infrastructure – Renewable Energy sectors achieve this by investing in environmental companies and green energy. However, it’s less well known that ESG plays an increasingly important role in the investment process for many investment companies outside these sectors.
The AIC has spoken to a number of managers from a diverse range of sectors about the role of ESG in their investment approach and how this benefits investors. Their thoughts are collated below.
ESG: its role in the investment process
Mark Mobius, Joint Manager of Mobius Investment Trust, said: “At Mobius Capital Partners we have developed a specialised active investment strategy built on working closely with portfolio companies to improve corporate governance and to provide a clear ESG pathway. We see ourselves as atypical, as we do not screen out investments or only focus on companies with high ESG ratings. We work with companies on a range of material factors, from helping to improve investor relations to suggesting enhancements to decrease water usage or lower employee turnover.”
Austin Forey, Manager of JPMorgan Emerging Markets Investment Trust, said: “ESG considerations are a natural part of our fundamental research and overall approach to investing which focuses on the longer term. It’s embedded in our process. Our fundamental analysis of any company examines what we call its economics, duration and governance. Environmental and social issues are part of the consideration of a company’s duration and its economics; a business simply isn’t thinking about its long-term future if it’s destroying the environment or abusing the community in which it operates. It will eventually pay a price for this. When considering governance, we focus on whether a company shows a proper regard for the interests of all shareholders and whether it can demonstrate proper stewardship of a company’s assets and value over time.”
Andrew Graham, Portfolio Manager of Martin Currie Asia Unconstrained Trust, said: “Integral to our fundamental research is a focus on environmental, social and governance (ESG) factors, as we believe sustainable, well-managed companies make more successful long-term investments. We believe that to gain a full understanding of how sustainability factors can impact a company’s future returns they must be embedded throughout the entire investment process. Active ownership and engagement are a key part of how this analysis is carried out and will inform a continuous assessment of the investment case.”
Adam Heltzer, Head of ESG and Sustainability at Partners Group, the investment manager of Princess Private Equity, said: “We take a systematic approach to integrating ESG factors throughout the investment process, from sourcing, through to due diligence and continuing during ownership. For each investment opportunity, our investment teams are required to perform an ESG assessment, using a proprietary ESG due diligence tool we have developed. The tool distils the wide range of potential ESG topics into those most likely to be material for a given industry and geography.”
"...we believe sustainable, well-managed companies make more successful long-term investments."
Andrew Graham, Portfolio Manager of Martin Currie Asia Unconstrained Trust
Examples of ESG investing in practice
Mark Whitehead, Portfolio Manager of Securities Trust of Scotland, said: “We believe well-managed companies that exhibit strong corporate governance are more likely to be successful long-term investments. This sentiment isn’t driven by idealism, but simply by the reality that companies exhibiting strong governance tend to outperform over time. Take Dutch science company DSM for example. Having engaged with the company, we were able to better understand the most material benefits that the company experiences from its well-regarded sustainability programme. In particular, we noted the positive impact its sustainability credentials had on its ability to attract workers, as well as the importance of supply-chain transparency and sustainability for its customers. This increased our confidence in the long-term outlook for the company as well as reducing the overall risk profile of the business.”
Andrew Graham, Portfolio Manager of Martin Currie Asia Unconstrained Trust, said: “Establishing a dialogue with companies enables us to engage on areas where we need further assurance or clarification, often with quite technical questions. Recently we have had a very successful engagement with one of the portfolio’s holdings, Hong Kong-based insurer AIA, around issues of disclosure, governance and remuneration. The clarifications we received from the company helped resolve some of the questions we had, but crucially the process reconfirmed our assessment that the company scores highly in terms of disclosure and indicated where improvement is still possible.”
Zehrid Osmani, Portfolio Manager of Martin Currie Global Portfolio Trust, said: “With a global movement to reduce the human impact on the environment and preserve our precious resources, the development of electric vehicles is a key theme for us. This trend will be driven by both regulations – as governments legislate to enforce the switch away from the internal combustion engine – and consumer demand, as more environmentally-aware customers seek out cleaner forms of transportation. ESG analysis therefore provides the crucial lens for understanding the impact these changes have at a company level.”
“With a global movement to reduce the human impact on the environment and preserve our precious resources, the development of electric vehicles is a key theme for us."
Zehrid Osmani, Portfolio Manager of Martin Currie Global Portfolio Trust
Adam Heltzer, Head of ESG and Sustainability at Partners Group, the investment manager of Princess Private Equity, said: “In 2018, we invested in Techem, a German-based global market leader in the provision of heat and water sub-metering services. During our investment committee discussions, it became clear that energy efficiency was at the heart of the company's offering. By enabling heating and energy supplies to be managed in a more precise and sustainable manner, Techem's solutions today account for 6.9 million metric tons of CO2 emission savings per year, thus contributing to global climate protection objectives. We decided that growing Techem's positive impact on the environment had to be a key component of our business plan. Through our investment, not only of capital but also of human resources, we hope to make a significant contribution to making Techem even more impactful.”
What does an ESG approach offer to investors?
Mark Mobius, Joint Manager of Mobius Investment Trust, said: “First and foremost, taking ESG seriously means risk management. Companies that have good corporate governance and pay attention to the environment and social issues run less risk of becoming involved in scandals, having to pay fines or facing social problems.
“A recent study shows that companies implementing changes to environmental, social or governance standards following engagement from investors generated more than 7% of excess returns after 18 months. This is also supported by our personal experience during many years of investing in emerging markets. By taking ESG factors into account, investors can significantly reduce the risk profile of their investments, which over the long term not only translates into positive risk-adjusted returns, but also positively impacts all stakeholders.”
Austin Forey, Manager of JPMorgan Emerging Markets Investment Trust, said: “We do not see ESG as something that restricts our ability to generate returns. It’s a necessary part of what we do. We take a long-term view because we believe it delivers better results, reduces costs and allows the power of compounding to translate into investment outcomes. Anything which affects the long-term prospects of companies is important to us, just as it should be to the companies themselves.”
"First and foremost, taking ESG seriously means risk management."
Mark Mobius, Joint Manager of Mobius Investment Trust
Adam Heltzer, Head of ESG and Sustainability at Partners Group, the investment manager of Princess Private Equity, said: “We believe that the integration of material ESG factors into our investment processes is a core part of our duty to act in the best interest of our clients and their beneficiaries. Furthermore, when it comes to managing ESG factors effectively, we believe private market investors have inherent corporate governance advantages compared to their public market peers, both in terms of mitigating ESG risks and creating value from ESG factors through targeted value creation initiatives. Our active, hands-on ownership model provides opportunities to work closely with portfolio companies to implement superior, sustainable investment strategies and enhance investment returns.”
"Our active, hands-on ownership model provides opportunities to work closely with portfolio companies to implement superior, sustainable investment strategies and enhance investment returns.”
Adam Heltzer, Head of ESG and Sustainability at Partners Group, the investment manager of Princess Private Equity
Income Finder
Discover our new suite of tools and resources to help income investors
The AIC has launched Income Finder, a new set of tools and resources to help income seekers research and analyse investment companies.
Income Finder enables investors to create a virtual portfolio of income-paying investment companies, track the dividend dates and see how much income they could receive over a year. This allows investors to customise their investment company portfolio to smooth monthly income over the year, ensuring there are no periods without dividend payments, or shape the income to meet their needs.
Income Finder comprises four sections: Income Builder, Dividend Diary, My Income Portfolios and Guides & Glossary.
Income Builder allows investors to create a portfolio of income-paying investment companies. Investors can sort and select investment companies based on their dividend frequency, dividend yield or the month in which dividends are paid. Once investors have created a portfolio, the dividends paid are displayed across an interactive 12-month graph. The graph shows useful information including the average monthly income and the number of months when no income is paid. This can be viewed for the last 12 months and for any of the past three calendar years. For first-time visitors to Income Builder there is an interactive tutorial to help them get started.
Dividend Diary shows every investment company dividend payment date for each month from January 2016, helping investors find investment companies which are paying income in the months when they need it. Dividend Diary is updated as investment companies announce new dividend payment dates and investors have the option to include or exclude special dividends in their search.
The My Income Portfolios section gives investors more information about the portfolios they have created such as the dividend cover, 5-year dividend growth and the frequency of the dividends. Guides and Glossary provides a range of resources to help income seekers including videos, articles and jargonbusters.
Ian Sayers, Chief Executive of the Association of Investment Companies, said: “Income is a top priority for many investors. We have launched Income Finder to help our investors easily research income-paying investment companies, with clear graphs and images to see how much cash they would have received over the year and when dividends are paid. Investors can tailor their income portfolio to suit their needs, whether this is making sure they receive income in time for Christmas or ensuring they get a steady stream of dividends every month. There is also a Dividend Diary which shows when every AIC member pays dividends and a Guides and Glossary section with income-focused information. Last year, there were a record number of visitors to our website and we hope Income Finder will be a useful tool to help inform investors’ choices.”
Life lessons
Ian Cowie reflects on what he’s learnt about investing over nearly 30 years
Ian Cowie
Everything is obvious to everyone in hindsight but finding out for yourself can be an expensive way for investors to learn. That’s why, ever since I was a cub reporter in the City Office of a Fleet Street newspaper, I have never been shy about asking experts for the benefit of their experience.
Now, after nearly 30 years as a shareholder in various investment companies, people sometimes ask me what I wish I had known when I began investing. That would be a very long list but here are three of the most important things I have learned - often, sad to say, the hard way.
Diversification is the simplest and surest way to diminish the risk inherent in stock markets. It might sound obvious but the first rule of investment - ‘spread risk’ - is worth repeating because I have seen so many intelligent people make the mistake of having too many eggs in too few baskets. Then, when things go wrong, they get scrambled. Even after the longest period of rising share prices on record - perhaps especially after such a long stock market bull run - we should never forget that prices can fall without warning and we may get back less than we invest in the market.
The good news is that investment companies automatically diminish risk by diversification because they spread individual shareholders’ money over dozens of different underlying assets, sometimes more than a hundred separate holdings. This reduces our exposure to the danger of disappointment - or even disaster - at any one company or, as may be the case in international funds, any one country or currency. More positively, diversification may also give us a share in income or growth from a wide range of sources.
"It might sound obvious but the first rule of investment - ‘spread risk’ - is worth repeating because I have seen so many intelligent people make the mistake of having too many eggs in too few baskets."
Ian Cowie
With more than a dozen investment companies in my ‘forever fund’ - a lifetime’s savings, intended to pay for retirement - I hope my portfolio will prove reasonably resilient whatever happens. For example, my shares in Worldwide Healthcare (WHH) should give me exposure to developments in this sector, wherever they occur, and people will always want to live longer, healthier lives.
The second most important investment lesson I have learned is that it’s wise to hope for the best but to prepare for the worst. Investors who leave the safety of deposits in the hope of higher returns are going to lose money at some point and it is better to beware of this before it happens to reduce the risk of reacting badly. For example, I remember how the first internet revolution ended abruptly when the dot.com bubble burst at the end of the last millennium in 2000. Many individual businesses whose value had ballooned became worthless and investors lost the lot.
Fortunately, my shares in Polar Capital Technology (PCT) gave me access to a global range of professionally-selected companies in this sector. While valuations remain volatile and have plunged in the past, dragging PCT shares downward, they have subsequently recovered and - like WWH - PCT remains one of my most valuable holdings. That raises the third lesson I wish I knew when I started. Let time do the heavy lifting. The sooner investors start the better because money never sleeps and it should be put to work without unnecessary delay. Procrastination is often called the thief of time but it can also rob anyone hoping to build a big enough fund to enjoy retirement or accumulate wealth for any purpose. This applies at all ages. Young investors can benefit most from compounding or the ability for income to generate new income and growth to create new growth. Older investors can also gain from preparing for pension freedom long before we actually retire by investing modest sums before our life savings are at stake.
"Young investors can benefit most from compounding or the ability for income to generate new income and growth to create new growth."
Ian Cowie
Investors of all ages can benefit from getting time on our side. As a general rule, you should only invest money in the stock market that you can afford to commit for five years or more because this will reduce the risk that individual circumstances force you to sell when prices are temporarily depressed. The longer you can afford to invest, the less likely it is that you will sell when prices are low and the more likely you are to receive the rewards that only risk assets can deliver.
An extreme example would be my longest-held investment companies, JPMorgan Indian (JII) which was called Fleming Indian when I invested at 63p per share in June, 1996. They are trading at 719p now. The past is not a guide to the future and, when considering the shares in my portfolio, I cannot resist pointing out that JII is not the top performer over the last 10 years. According to statisticians Morningstar, that honour falls to Baillie Gifford Shin Nippon (BGS) - a Japanese smaller companies specialist - which delivered share price returns of 1,039%.
"Let time do the heavy lifting. The sooner investors start the better because money never sleeps and it should be put to work without unnecessary delay."
Ian Cowie
Unfortunately, I did not invest in BGS until six years ago, since when it has become one of my top 10 most valuable holdings - although I still wish I had started sooner! Fortunately, I did hold shares in PCT and WWH a decade ago, which delivered returns of 653% and 474% respectively during this period. The average for all conventional investment companies is 369%.
All the investment companies mentioned in this article - and others - gave me professionally-managed and diversified exposure to their sectors, helping me hope for the best and prepare for the worst, while time did the heavy lifting.
