High Conviction, high quality exposure to India: Abrdn New India

ANII offers high conviction, high quality exposure to India…by Ryan Lightfoot-Aminoff

Overview

Managers James Thom and Rita Tahilramani have a strong focus on quality when selecting equities for abrdn New India (ANII). The concentrated portfolio is populated from the bottom-up, with the managers looking for firms with high levels of recurring cash generation, sound balance sheets and good management teams. They have the flexibility to invest across the market-cap spectrum, although have found the majority of the best opportunities in larger companies, which make up around two thirds of thePortfolio.

The managers’ focus on quality has contributed to good NAV resilience despite the volatility of the past year. Share price returns have been particularly strong though, leading to a significant narrowing of the Discount year to date. Despite this, ANII remains at a wider rating versus the average of its India peer group.

India’s recent market pullback has provided James and Rita with several opportunities. They argue the recent volatility has led to a resetting of earnings expectations and valuations, which they have sought to capitalise on by rotating from their better performers, like real estate firms, into sectors such as the consumer discretionary sector where valuations have reset to more realistic levels. This has included rotation within certain sectors, as well as adding in areas where they believe they can capture a potential recovery, such as the diversified financial holdings sector, now that the Indian Government has reversed the policy steps that contributed to the pullback (see Performance).

So far, portfolio rotation has provided sufficient capital to fund new ideas. However, the board has renegotiated ANII’s Gearing facilities at a lower interest rate. At present, ANII is the only trust in the peer group using gearing, and the managers have headroom now to increase exposure should they identify more high-quality opportunities at good valuations.

Analyst’s View

 
ANII is arguably the highest conviction trust focussed on the exciting structural growth potential of the Indian market. This is supported by the concentrated positioning, with the top ten holdings accounting for nearly half of the Portfolio, as well as ANII being the only one in the peer group to currently use Gearing. As such, ANII can be viewed as one of the most effective ways of gaining India exposure in the peer group, in our opinion.

Whilst these characteristics may lead to questions over a higher level of risk, we believe this has been more than appropriately managed through a highly disciplined process, with James and Rita focussing on companies with high quality characteristics, and with a bias toward larger companies. The trust’s outperformance in the recent Indian pullback is a testament to this, and therefore the trust could also appeal to more risk-conscious investors (see Performance).

This performance and attractive quality profile may have been recognised by investors, with the Discount having narrowed markedly in the year to date, from 17.6% at the beginning of the year, to c. 10% currently. This may have been supported by investors rotating capital from a direct peer’s tender offer into ANII’s wider rating, or simply looking to take advantage of the wide discount despite good performance. Regardless, ANII’s discount remains the widest in the peer group, which we believe continues to offer considerable upside potential.
 

Bull

• ANII offers quality exposure to India’s structural growth story
• Discount remains wide relative to peer group average
• ANII has changed fee structure for better shareholder alignment

Bear

• Indian economy faces threats from elevated tariff regime
• Large cap bias could mean exciting growth opportunities in small-caps are overlooked
• Whilst limited, gearing can increase downside moves, as well as supporting upside potential

See the full research on Abrdn New India here >
 

Disclaimer

This is a non-independent marketing communication commissioned by abrdn. 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.