It doesn’t matter if India never matches the manufacturing prowess of China. Just stay focused on the fact that the subcontinent is urbanising at a dramatic pace, and has much better demographics than China, to be confident that long term investors are going to make a lot of money.
That’s the admittedly somewhat abridged philosophy of the managers behind one of the best performing India funds, which has recently broken through the $100m threshold and now has a sterling class for UK investors.
Ashburton India Equity Opportunities is up 31 per cent since June 1 in sterling terms, turbo-charged of course by the pound’s fall, but impressive nonetheless. In dollar terms it is up 7 per cent over the past year, which includes the sharp fall in the Bombay Sensex index at the start of 2016, and up a dramatic 118 per cent over three years.
Its managers acknowledge that few advisers will have heard of Ashburton, a boutique operation based in Jersey. But it is part of First Rand, one of South Africa’s biggest financial services firm, and as CIO Jonathan Schiessl says, “five times the size of Investec”.
Historically the firm has focused on multi-asset funds, largely for institutional and offshore investors, but it is building a reputation in emerging markets and is keen to ramp up its retail offering. However, Ashburton is not a fan of the Brics concept, seeing Brazil and Russia as essentially commodity economies, and India and China also having very different growth dynamics.
“India is a very young country, China is ageing. In India, the population is still only 30 per cent urbanised. That was the level of urbanisation in China in 1991,” Schiessl says.
Urbanisation matters because it drives economic growth by increasing productivity – and raising demand for all the goods that urban consumers buy. At the very basic level, urbanisation also involves building homes – and using vast amounts of cement.
Cement is one of the fund’s key themes, through stocks such as UltraTech Cement, India’s largest maker of concrete, mixing around 70 million tonnes of the stuff every year.
India’s prime minister, Narendra Modi, has embarked on a “Housing for All by 2022” programme, which involves the construction of more than 20 million new homes. As Schiessl – the fund’s lead manager – points out, 60 per cent of cement is used for housing, so the likes of UltraTech are going to see a huge surge in demand.
It’s not just housing that is transforming. India is also building new roads at a frenetic rate compared to its recent past. In 2015 it was only managing to open 2-4km a day of new roads; last year it jumped to 25km a day, and is on track to reach 40km a day soon.
Transport infrastructure is taking off; local states have devised ways to build rudimentary airports for just $2m (barely a few inches of a runway at Heathrow) to feed the country’s remarkable growth in low-cost budget airlines.
Just as important is the rebuilding of the country’s creaking rail network, including ways to get freight moving more efficiently.
The critics will say they have heard all this before, and that while India produces lots of plans for infrastructure, getting it built is another thing.
But Schiessl says: “There is something of a misconception about infrastructure in India. The big issue is land acquisition, which can be a very frustrating and long process. But in other areas infrastructure improvements are amazing. For example, India has the cheapest mobile phone rates anywhere in the world. Yet I can remember coming to India in the 1980s and waiting four days just to be able to make a call, and at an outrageous cost.”
Financial services, though, are a bigger part of the fund than industrials. Ashburton’s managers have little time for the major banks, which have significant issues around non-performing loans, especially to the steel sector.
They prefer the non-banking companies offering access to financial services to many for the first time. The fund’s largest holding is Housing Development Finance Corporation, which has so far lent against 4.4m housing units. Its average mortgage is just $35,000, lasts 13 years and has a loan to value ratio of of 65 per cent. Between March and October 2016 its share price jumped from 1,000 rupees to nearly 1,250.
The managers also like Capital First, which is part of a government-led scheme to open 250 million bank accounts for the rural poor. The government wants to make sure subsidies on things such as kerosene gets paid to the people it is supposed to – slashing corruption as well as engaging the population in modern finance.
Another government initiative – a new VAT-style tax – is more of an economic game-changer than people realise, says co-manager Simon Finch. Every one of the 36 states that make up India have in the past levied separate taxes. Creating a single national tax is almost akin to creating a new huge single market – and will mean that truck drivers will no longer spend 25 per cent of their time at internal customs check points.
India may look expensive to outsiders – the market has been trading on around 21 earnings and the Ashburton fund itself is on a price to earnings ratio of close to 26, but while multiples in India have traditionally been high, they are, arguably, supported by strong earnings per share growth.
Ashburton runs a highly concentrated portfolio – just 28 stocks currently. Turnover is also remarkably low, at below 20 per cent. Perhaps the most intriguing aspect is that it’s run from Jersey, although it draws upon five investment professionals in Pune, India.
Finch argues that India is probably the most over-broked market in the world. “In Jersey we can get away from the noise,” he says, and so far the strategy seems to be working.
$106m Assets under management in the Ashburton India Equity Opportunities fund
31% The fund’s performance since 1 June in sterling terms
28 The number of stocks in the portfolio
20% Annual turnover of the fund
India’s rapid urbanisation means long-term investors could potentially reap substantial rewards from investing in the country, the managers of Ashburton India Equity Opportunities say. Although even over the short-term the managers are generating impressive returns, with the fund up 31 per cent in less than five months. The managers dismiss China as an ageing country while asserting India is demonstrating the potential that China had 25 years ago, with only 30 per cent of the population urbanised – the level China was at in 1991. As such, cement is one of the fund’s key themes; 60 per cent of cement is used for housing.
Jonathan Schiessl is chief investment officer within Ashburton Investments’ international investment team and has responsibility for the firm’s global investment fund range and portfolio management services as well as being the lead manager for Ashburton’s India Equity Opportunities fund.
Schiessl joined Ashburton in 2000 as co-lead manager for the Asia Pacific fund, and then successfully launched the Chindia Equity fund in 2006, which he managed until his promotion to head of equities in 2014.
Prior to working at Ashburton, Schiessl, who has 20 years’ experience in the investment industry, worked for Bank Julius Baer and other financial institutions in London.