Fund Spotlight: invest in India with this active outperformer

The growth story of the Indian economy and stock market needs little introduction for those who follow emerging markets. Like the US market, Indian shares currently trade at a premium of over 20 times expected earnings, making it one of the most highly valued markets in the world. This premium is a consequence of investor confidence, strong fundamentals and capital flows to this region.

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In a market with such rich valuations, investors could benefit from adding exposure via an active fund which aims to find value in an already elevated market. Perhaps the heightened volatility of the Indian market is a further reason to consider an active manager who might fare better than the wider market by steering clear of the riskier companies in this region. The Goldman Sachs India Equity Portfolio is one way to gain exposure to this thriving region and is a recent addition to ii’s Super 60 list of investment ideas.

This fund benefits from highly experienced manager Hiren Dasani. His involvement runs deep, as he joined the India equity team in 2007, and has been at the helm of this strategy since May 2017. Dasani draws upon the five-member senior analyst team in Mumbai, which boasts an average of 18 years of investment experience, for stock coverage and idea generation.

The objective of the manager is to capture the growth potential of the Indian economy. The MSCI India Investable Market Index (IMI) is used as a reference benchmark, which has a greater representation of the small and mid-cap segments of the market than the MSCI India Index.

What does the fund invest in?

To meet their growth objective, management seek to invest in sound businesses of all sizes. The team starts by evaluating the attractiveness of a company’s industry.The team considers the competitive intensity of a company a key qualitative factor, preferring companies with strong competitive advantages and low or decreasing industry competition. They also assess the company’s growth potential, regulatory environment and management quality. Company meetings are a crucial part of the process, and the team's ability to meet companies on the ground in India differentiates it from many funds in its peer group.

The team will then focus on the valuation of a business primarily concentrating on cash flow metrics. This helps them to evaluate a company’s value drivers and reinvestment opportunities. This valuation flexibility allows them to justify paying a higher premium if a stock's prospects are promising.

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Although the team is style and market-cap-agnostic, the portfolio has historically shown a persistent bias towards small and mid-cap companies, which have been fertile grounds for the team to identify less-efficiently priced securities. The average market cap of the portfolio is $9.6 billion (£7.7 billion), standing at less than half the MSCI India IMI Index’s $20.6 billion. The resulting portfolio is well diversified across 114 names, which reduces stock-specific risk. Turnover has averaged 25-35% annually over the past five years, in line with the team’s long-term mindset.

At the sector level, financial services represent the largest allocation in the portfolio at 24.2%. ICICI Bank Ltd ADR (NYSE:IBN) (5.5%) remains the team’s top pick in the sector and the largest position in the portfolio. The 21.8% allocation to consumer discretionary is the portfolio’s largest overweight position, 8.7 percentage points above the benchmark. Hyundai Motorsis a recent new addition within this sector, the carmaker’s India listing in 2024 was the nation’s largest IPO in history, raising $3.3 billion. Management believes the company is well placed to gain market share within the electric vehicle market. Better designs and higher value add features have helped the company move up to a higher level on the customer desirability ladder. Recent exits in the consumer discretionary sector include Maruti Suzuki and Tube Investments after they both posted disappointing earnings releases.

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Another recent addition to the portfolio is NTPC Green Energy within the utilities sector. It was added to the portfolio via participation in its recent IPO. The company is focused on new energy solutions such as green hydrogen, green chemicals and battery storage. The company has plans to grow through prudent bidding and strategic joint ventures. Despite this addition, the portfolio remains light in the energy and utility sectors which remain underweight positions.

How has the fund performed?

This fund displays a strong performance track record outpacing the benchmark and category peers in four of the past five calendar years. Looking further out, the fund has also outperformed over longer horizons, bettering the benchmark index by 1.8 percentage points over five and 10 years. The success over the long term has been driven by superior stock selection within the small and mid-cap segment.

The strategy is expected to outperform in markets driven by stock-specific factors, given its focus on fundamentally sound companies at reasonable valuations. Conversely, the strategy may underperform in momentum-driven markets and when small/mid-cap underperform mega/large caps. The strategy outpaced in 2023 as small and mid-caps outperformed. Conversely, it lagged in 2022 when large caps outranked mid/small caps.

Source: Morningstar Total Returns (GBP) to 31/12/2024. Past performance is not a guide to future performance.

Why do we recommend this fund?

For investors looking to add exposure to the Indian market, the GS Indian Equity Portfolio represents a high-quality option. The strategy’s bottom-up and conviction-driven investment approach has been applied consistently since inception in 2008 and by Dasani since he took over the strategy in 2017, resulting in an impressive track record.

This strategy benefits from a compact but experienced analyst team with an onshore research presence and expertise in the small/mid-cap area of the market. This adds a competitive edge relative to some peers without a physical presence in the country.

Investors should take into consideration that this is a single-country fund with a bias towards medium and smaller companies, so it is heavily dependent on the Indian economy, and performance can be volatile as a result.

Access to active management in this region comes at a premium compared to developed markets, however the fund's ongoing charge of 0.94% offers value relative to peers in this sector.

Please find the latest factsheet here.