Ian Cowie: why I have bought another India investment trust

Our columnist now owns two trusts investing in the emerging market superpower. He explains why he has diversified.

India’s prime minister, Narendra Modi, electrified the first day of the United Nations’ COP26 climate summit when he said half his country’s energy would come from renewable sources by the end of this decade. In a flash, India became the go-to option for investors in emerging markets who are concerned about environmental, social and governance (ESG) issues.

Arguably, it is the only ESG option among the emerging market ‘big four’ who are sometimes dubbed BRICs - that is, Brazil, Russia, India and China. Modi is the only leader of those countries to turn up to COP26 in Glasgow so far, with Jair Bolsonaro, Vladimir Putin and Xi Jinping choosing to stay at home.

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As usual, there were plenty of critics who said Mondi should have gone further and faster. Some criticised his pledge for India to cut pollution with carbon emissions falling to ‘net zero’ by 2070, fully two decades later than the preferred 2050. Meanwhile, others questioned his call for rich countries to pay $1 trillion towards helping emerging markets hit their eco-targets.

Never mind the macro-economics, here’s a money-making idea. Value-seeking investors should scrutinise India because it is one of the Association of Investment Companies’ (AIC) highest-performing and lowest-priced sectors.

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According to Morningstar, the average India investment trust delivered total returns of 43% over the last year but its shares remain priced nearly 14% below their net asset value (NAV). I have personal experience of this paradox because my longest-held share and very first ten-bagger is JPMorgan Indian (LSE:JII).

I began investing in what was then Fleming Indian in June 1996, when I paid 63p for shares that trade at 818p this week. But it has been a bumpy ride along the way, as demonstrated by total returns of 38% over the last year, 19% over the last five years and 121% in the last decade. Such lumpy performance goes a long way to explaining why these shares are priced at a 17% discount to their NAV.

Meanwhile, JII delivered zero dividends, which might have paid shareholders to be patient during difficult periods when there was low or no capital growth. Nor was there anything theoretical about these ‘fallow years’; JII was the bottom-performer in its sector over the last decade and five-year periods, while ranking second-from-bottom over the last year, just ahead of Aberdeen New India (LSE:ANII), whose total return was 33%. By contrast, the top performer in this sector over the last year was Ashoka India Equity (LSE:AIE), which delivered total returns of 86%.

Unease about JII’s relative underperformance led me to diversify my exposure to the sub-continent by investing in India Capital Growth (LSE:IGC), where I bought shares for 120p each on 10 September 2021. This also had the advantage of adding IGC’s medium-sized and smaller companies themes to JII’s focus on bigger businesses, such as the latter’s top holding, Infosys (NYSE:INFY), whose billionaire founder, Narayana Murthy, happens to be father-in-law to chancellor Rishi Sunak.

By contrast, I cannot claim to recognise any of IGC’s top 10 holdings - but, given its mid- and smaller-cap remit in a country I have never visited, neither would I expect to. More importantly, IGC has beaten JII in all three standard investment periods with total returns of 68%, 42% and 183%, while continuing to trade on a discount of 13% to NAV.

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However, investors seeking long-term returns from India had better be prepared for short-term setbacks. David Cornell, chief investment officer of IGC, told me: “Anyone who invested in the Indian stock market 20 years ago would have enjoyed over 16% annualised returns. But it hasn’t been all in a straight line, there have been deep dips along the way.

“India is enjoying something of technological revolution. Young people are early adopters and access to connectivity via smartphones is the cheapest anywhere. In India, 99% of online activity happens on phones.”

Similarly, Rajendra Nair, one of the investment managers at JII, contrasted current problems with future opportunities: “While the near-term outlook is undoubtedly dependent on the trajectory of the coronavirus pandemic, the investment case for India remains compelling in the long term.

“India remains an early stage economy with a long runway of growth for the foreseeable future. There are many well-run businesses that have demonstrated remarkable resilience, not only to survive the extreme environment over the past year, but also demonstrated the potential to eventually emerge stronger, grow profitably and create value for shareholders.”

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Returning to where we began, with Modi’s economic reforms and targets, Ramesh Mantri, senior investment analyst at Ashoka India Equity, pointed out: “In its recent biennial World Economic Outlook, the International Monetary Fund (IMF) projected that India’s gross domestic product (GDP) - a measure of economic growth - would be the highest of all major economies in 2022.

“Broad-based reforms in the $23 billion (£16.8 billion) Production Linked Incentive for 13 key sectors - including autos, electronics and steel - will mark another step in integrating Indian manufacturing with global supply chains. Many global players - such as Apple (NASDAQ:AAPL) - are also scaling up their India operations meaningfully.”

It all adds up to good reasons for investors to consider India and for the world’s biggest democracy to enjoy Diwali this week. The Hindu festival of lights culminates on 4 November this year and is also celebrated by Jains, Sikhs and some Buddhists. To this respectful agnostic, it seems entirely appropriate that Diwali symbolises the victory of good over evil, knowledge over ignorance and light over darkness.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor. 

Ian Cowie is a shareholder in India Capital Growth (IGC) and JPMorgan Indian (JII) as part of a diversified global portfolio of investment companies and other shares.