A guide to Ashoka India Equity Investment Trust

India has been the go-to emerging market for investors for the best part of a decade now. Since Prime Minister Narendra Modi was sworn in in May 2014, Indian equities have returned almost 140% to investors, well ahead of every other major market, with the exception of the tech-fuelled S&P 500*. India accounted for only 4% of the broader APAC equity market in 2014, but the share increased to 12% by 2024, while the market cap of FTSE India Index has grown over six times in the past 10 years**.

Modi’s policies have transformed India in the past decade. They cover the likes of banking, manufacturing, inflation management and an increased focus on physical and digital infrastructure, all of which have boosted the long-term growth potential of the economy.

This has not gone unmissed by markets, with valuations of Indian equities surging to a premium when compared with many of their emerging market peers. Many have expected a short to medium-term pullback at these valuations – which has made the past few months very interesting for the Indian economy. Since September 2024, Indian equities are now down by almost 10%***. The economy is projected to grow 6.4% in the 2024-25 fiscal year, but this is the slowest level of growth in four years, and markedly below the 8.2% figure recorded for the previous financial year****. The slowdown is due to numerous factors, including muted consumer demand and reduced government spending. There has also been a notable drop in foreign investment.

Some would say this is part of a structural decline, but after years of strong growth from a country boasting both stable politics and strong corporate governance, this could be an opportunity, given valuations have fallen to a degree. For example, the forward P/E on the BSE Sensex is now at 20.2x, compared with an average of 20.7x in the past decade^. Small and mid-caps have been a particularly strong growth market for India, with the BSE MidCap and Smallcap 250 indexes both still ahead of their long-term P/Es, although both have fallen back, to a degree^.

“When small and mid-caps corrected in 2018, it could be pinpointed to certain macro factors, there is not one single factor in 2024-25. Factors like slowing GDP, corporate earnings and foreign flows are more transient.”

That’s the view of Ashoka India Equity Investment Trust portfolio product specialist and macroeconomist Dipojal Saha. Launched in 2018, the Ashoka India Equity (AIE) trust aims to achieve long-term capital growth by investing in Indian companies of all sizes. The trust adopts a bottom-up stock-picking approach to target scalable businesses with sustainable superior returns on capital. The trust has a bias towards mid and small-caps and is managed by the team at White Oak Capital, which consists of over 40 analysts with a strong, on-the-ground presence in the Indian market. Lead manager Prashant Khemka is the founder of White Oak, having previously been CIO and the lead portfolio manager for the Goldman Sachs India and Emerging Markets Equity strategies.

Since its launch in 2018, AIE has produced exceptional returns for investors (see performance section).

Investment process

The investment process on this multi-cap vehicle is centred around bottom-up stock selection, allowing the huge in-house research team at White Oak to scour the entire investment universe of some 800 companies (with a market cap in excess of $600m) to find well managed and scalable businesses with superior returns on capital and good governance, at a price that is at a discount to what the team see as its intrinsic value.

The initial universe of 800 companies is screened for factors like poor governance and other weak characteristics; as well as targeting firms which are alert to structural changes which can benefit their business. This brings the potential number of companies down to around 200, which the team then analyse in depth. The team then target businesses they believe are attractively valued when building a final portfolio – they use a valuation model called OpcoFinco to make sure they are not overpaying for a stock.

The final portfolio currently holds 148 names, with the team recently gaining approval to increase the number of holdings (previously 50-100). This is because the team feels that having a specific limit on holdings restricts their ability to generate alpha.

Despite having a bottom-up focus, structural biases do come out of the process. For example, the team is unlikely to have large weightings in sectors like commodities, utilities, real estate and tobacco. This is because they are poorly governed, while being invested in heavily regulated state-owned enterprises can often limit growth.

AIE also has a strong bias towards the mid and small-cap space, giving it exposure to a number of domestically-focused businesses. The trust has a unique charging structure which is designed to increase the alignment of interest between investors and shareholders (see performance section).

Why now for this portfolio?

• After an incredibly strong run, small and mid-caps in India are down 17.3% since the start of September 2024, potentially offering an attractive entry point for investors^^.
• AIE has a strong team in India, allowing them good access to the growing SMID-cap and late-stage pre-IPO space.
• Increased number of stocks allows the team greater scope to generate alpha (although this could also dilute performance).
• Performance has been incredibly strong, returning 124.6% to investors in the past five years alone^^^. Since launch in July 2018, it has produced an annualised return of 18.5% (vs. 11.4% for the MSCI India IMI)^.
• Fee structure that aligns the interest of management with investors.

Manager’s view 

A lull not a decline; Trump insulation and Budget backing

Dipojal says there are numerous reasons to remain confident in the Indian economy. For example, while foreign flows have been more volatile, they have been offset to a degree by domestic flows as there has been increased retail buying, with a notable shift towards SIPs (systematic investment plans), with investors committing to regular monthly investments into mutual funds.

India also has a degree of insulation from the threat of tariffs from US President Donald Trump. Although India is a significant exporter of IT and pharmaceutical services to the US, the deficit with the world’s largest economy is relatively small ($44bn), compared with the likes of China ($279bn)****.

India’s budget announcement early this month furthered the transitory case with proposals to boost consumption. The headline move was raising the earnings threshold before income tax is due, from Rupees 700,000 to 1,200,000 (equivalent to just under $14,000). The move brings the tax-free allowance in line with the UK, although the cost of living on these shores is five-times greater^^^^. 

Moves were also made on capital expenditure and fiscal consolidation. The fiscal deficit for FY25 is expected to be 4.8% of GDP, which is lower than the previous budget estimate of 4.9%^^^^.

“The government appears to have a strong emphasis on fiscal consolidation, keeping debt under control and attracting foreign investors. It’s also imperative for the government that its policies are transparent to the bond market. It appears a conservative and, importantly, a realistic budget,” Dipojal says.

Dipojal acknowledges there has been a correction but says part of the reason for India’s strong premium to emerging markets in the past has been due to the struggles of Chinese equities. A part of the rationale for the closing premium has been India’s correction coming in tandem with China having an upturn following September’s policy pivot.

Portfolio activity

Stock increase to boost alpha and pre-IPO opportunities

As mentioned already, last year the company approved a change to the investment policy to remove the upper limit of holdings (previously 50-100 companies) to be held by AIE. Dipojal says this move was to maximise the ability of the team to generate alpha at a time when the number of eligible companies for the portfolio has increased (there are now over 800 with a market-cap in excess of $500m).

He says: “$500M is not the magic number, our main goal is to generate alpha. A greater number of names gives us greater flexibility to do just that.”

Dipojal says that at $41bn India was the second hottest IPO market (after the US) in 2024. This is an area in which the team have an edge, with their on-the-ground capabilities. The team do not have a private equity focus and tend to invest in late-stage IPOs. A good example is Inventurus Knowledge Solutions, a firm which operates at the intersection of healthcare and technology, offering solutions to global healthcare providers^.

Other names added include State Bank of India, which was a move made to bolster financials exposure following the sales of other private sector banks. Other additions include Trent, a company which operates department stores, hypermarkets, supermarkets and specialty stores; and Varun Beverages, the largest bottling company of PepsiCo’s beverages in the world outside the United States^.

A number of sales have been due to valuations being hit. A good example is Cholamandalam Investment and Finance^. The company was a top 10 holding in 2024 and while the team feel it is still a great business, the opportunity is no longer in the price. “We still like the management and the company in general, but the capital is better deployed elsewhere to deliver,” Dipojal adds.

Strongest attributors to performance in 2024 came from a number of sources. They included online food platform Zomato (184bps contribution to returns); ICICI Bank (154bps) and Azad Engineering (149bps). Dipojal says most of the detractors came from the consumption side, led by Nestle India (-44bps), although it has started to produce stronger performance in 2025^.

It is important to note that although AIE has a bias towards small and medium-sized countries, it is multi-cap in structure, with large-caps accounting for over 40% of the portfolio^.

Market-leading performance and unique fee structure

AIE has been an incredibly strong performer since its launch in 2018. Since then it has returned 156% to investors, well ahead of its peer group (86.9%) and its benchmark the MSCI India IMI index (94.1%)^^^^^. Annualised performance stands at 18.5%, compared with an index return of 11.4%. From a net asset value perspective, the trust has risen 197.3% (vs. 100.6% for the sector)^.

The focus on bottom-up attribution and avoiding companies with weak corporate governance has also been highlighted with performance attribution, with 61% of stocks selected contributing to alpha generation^. The strength of stock selection is further highlighted by the outperformance of the top 10 contributors vs. detractors in the lifetime of the trust. For example, the largest detractor in the lifetime of the trust is Maruti Suzuki India (a loss of 555 basis points); by contrast, the top 10 contributors have added significantly more (Coforge +1768bps, ICICI Bank +1709bps and Navin Flourine International +1504bps)^.

Looking at the performance attribution analysis of AIE since its launch in 2018, we can see the strength of its focus further down the market-cap scale. Returns from small-caps since launch to the end of 2024 amounted to 123.5%, falling to 43.6% for mid-caps and 22.7% of total attribution for large-caps^.

The trust has a unique charging structure which is designed to increase the alignment of interest between investors and shareholders. The trust has no base management fee – meaning the team are only paid if the trust outperforms. The performance fee stands at 30% of the excess returns of the NAV per ordinary share and the MSCI India IMI benchmark (capped at 12% of NAV). The fee is also paid in shares to the team to ensure increased alignment of interests. The fee is based on performance relative to discrete three-year periods, the latest of which ended on 30 June 2024.

What else do investors need to know?

The trust may deploy up to 20% gearing of net asset value at the time of drawdown to seek to enhance long-term capital growth and for the purposes of capital flexibility and efficient portfolio management. It currently stands at just 1%^^^.

Since launch, the trust has traded close to its NAV and is currently operating at a slight premium of 0.84%^^^. The primary focus of AIE is capital appreciation, therefore shareholders should not expect it to pay an annual dividend. The small amount of income it does typically generate is used to pay its annual expenses.

Outlook

AIE is well positioned to tap into the growing tailwinds the Indian economy has in place. Strong corporate governance, a growing domestic economy and a team on the ground that can get access to opportunities ahead of their peers has been a great formula for the portfolio. Performance has been exceptional, and with valuations pulling back to a degree, this could be an interesting point to consider India once again.

*Source: FE Analytics, total returns in pounds sterling, 17 February 2015 to 14 February 2025

**Source: LSEG, 22 January 2025

***Source: FE Analytics, total returns in pounds sterling for MSCI India, 30 August 2024 to 17 February 2025

****Source: abrdn, 4 February 2025

^Source: fund presentation, January 2025

^^Source: FE Analytics, total returns in pounds sterling for the MSCI India SMID, 30 August 2024 to 14 February 2025

^^^Source: Association of Investment Companies, at 16 February 2025

^^^^Source: Alquity, 3 February 2025

^^^^^Source: FE Analytics, total returns in pounds sterling for AIE, MSCI India IMI and IT India/Indian Subcontinent, 6 July 2018 to 14 February 2025