The India Capital Growth Fund has bounced back, three months after the board warned shareholders that it had “significantly underperformed its benchmark” and was “likely to fail the second part of its three-yearly assessment”.
Ahead of an extraordinary general meeting in June, shareholders were told their choices were to either wind up the company or “take strong measures”. They voted overwhelmingly in favour of the latter.
Speaking to Portfolio Adviser sister publication International Adviser, David Cornell, managing director and chief investment officer of investment manager Ocean Dial, said the team was “pleased with the turn out and the strong support” the plans received.
“Both the share price and the NAV have performed extremely well since the vote was passed on 12 June.” The share price has rallied 30.2% since the EGM compared to 12.9% gains in the MSCI India index, according to FE Analytics data to 27 August. Its discount remains wide at 20.6%, slightly narrower than the 22.7% average discount it has traded at over the last 12 months, according to Hargreaves Lansdown.
India Capital Growth performance
| 1yr | 3yr | 5yr | 10yr | |
| India Capital Growth | -6.67 | -30.00 | 20.54 | 11.54 |
| IT Country Specialist: Asia Pacific ex Japan sector | 2.82 | 6.33 | 91.39 | 143.78 |
Source: FE Fundinfo
How Ocean Dial has taken measures to improve performance
As part of the “strong measures”, the firm bolstered its research team by hiring two sector analysts, plus a portfolio manager for its Gateway to India fund.
It has also created the ‘House of Ocean Dial’, an investment universe of roughly 140 stocks.
“Each analyst covers between 30 and 35 companies, they live and breathe those companies, 24/7,” Cornell said.
All of the stocks are pre-screened by the investment committee and the two portfolio managers can only pick from the approved list. The process has been up and running for about six months.
Cornell said the additional manpower and ‘House of Ocean Dial’ have been “a huge support to improving performance”.
Unlike the India Capital Growth fund, which invests predominately in small- and mid-cap firms, the Gateway to India fund is a multi-cap strategy.
It invests in companies that fall into three categories:
- Those with a registered office in India which are listed on recognised exchanges, worldwide;
- Companies that exercise a preponderant part of the economic acticity in India and are listed on recognised exchanges, worldwide; and,
- Companies whose equity and equity-related securities are listed, trades or dealth in on Indian stock exchanges.
The effect of coronavirus on India
Recent headlines about rising Covid-19 infection rates in India are not causing Cornell too much concern.
“There are pockets in India where cases are rising, and there are pockets where the R is below one. But in key cities, like Mumbai and Delhi, the R is coming down. It is in other areas of the country that momentum is building.
“India hasn’t yet gotten on top of it, but the numbers are very large because it’s a big population and the ability to socially distance is a lot harder.
“But the lockdown has been very strict; the Indian community has, by and large, stuck by the rules; and, if you look at the recovery rate, it is much higher than is other countries.
“The fatality rates are much lower, whether that’s because it is a young population or the warm climate or, as a population, they are much more resilient to this kind of virus outbreak – it’s hard to say.”
In terms of how the analysts conduct their research and due diligence, “like everyone else in the world, we’ve adapted to using the internet and using Zoom and Microsoft Teams”, Cornell explained.
“And we’ve found that companies are as accessible as they were before. So, in terms of getting insights into corporate and operational activity on a company-by-company level, our access is as good as it’s ever been.”
India’s data consumption far exceeds China and the UK
“One of the things we are seeing in India is the digitalisation of the economy,” Cornell continued. “Much like we’re seeing anywhere else in the world.
“But what’s interesting about India, is it’s coming off a much lower base. Smartphone penetration is still 60%, so there is massive opportunity to grow.
“Data consumption, however, is extremely high. It is double what it is in China, with about 13 gigabytes of data consumed by every individual each month.”
In comparison, it is around five gigabytes a month in the UK, he added.
“This massive consumption of data has been accelerated because of the lockdown.”
Another by-product of lockdown has been the drive towards ecommerce, and Cornell’s team has seen retail activity “picking up dramatically across all levels of society”.
India a beneficiary as geopolitics disrupt Chinese supply chains
“Another significant trend that we’re seeing emerge in India is supply chain disruption.”
With governments around the world looking to shift their reliance on China, “India is an obvious beneficiary”.
“We are seeing evidence of that happening in certain niche sectors. So, speciality chemicals is an area where you will see India winning marketing share, also in the pharmaceutical and healthcare sector.”
Whereas India, in the past, also relied on China to manufacture electrical equipment and components, “the government is increasingly providing incentives for companies to manufacture more, domestically”.
The prospect of a cooling in the US/China trade war and production of a viable vaccine doesn’t dim Cornell’s view that India will benefit even if China returns to favour.
“India has a labour cost advantage, whereby skilled labour costs a third of what it does in China. Also, the trade war is only one aspect of the geopolitical tension that exists between China and the west.”
Having shot up the World Bank’s ‘Ease of Doing Business’ rating to 63 from 125, “it’s not a case of if India participates more in the global supply chain, it’s a case of when”, Cornell added.
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