This article is part of Morningstar’s Guide to Investing in Asia where we navigate the potential risks for the chance of fantastic rewards from across the region.
We think shareholders of JPMorgan Indian (JII) are in good hands. The fund is managed by an experienced duo in Rukhshad Shroff and Rajendra Nair. Shroff, who was appointed in 2003, brings two decades of expertise. Nair has also seen a number of market cycles, having started his career in the industry in 1998.
How is the Trust Run?
Shroff runs a relatively concentrated, low-turnover approach focused primarily on companies with superior earnings that can benefit from India’s secular growth story. Approximately 40 names are selected from a universe of 200. While quality is the primary focus, the team will also take positions in lower-quality names when valuations justify it. Valuations are based on a mixture of relative attractiveness and discounted cash flow, which they assess with the assistance of brokers. Management is another area of focus, and both Shroff and Nair meet with each company before initiating a position.
The managers prefer companies with high-quality growth characteristics. HDFC Bank, a favoured long-term holding, typifies the fund's preference for companies with sustainable and superior earnings growth. The bank has grown earnings by more than 30% per annum consistently over the past 10 years, and the team believes management will continue to deliver as they focus on rolling out a rural banking strategy.
Financials has been a long-term overweight in the fund and the team has increased this in 2014 on the view it plays to a domestic recovery in India, while they have increased the sector weighting, they have reduced the concentration among individual names to add diversification. Consumer discretionary is another prominent theme in the portfolio, primarily through the team favouring the auto names.
The managers typically steer clear of areas of the market where corruption may be an issue. For example, they are wary of property developers, especially those able to complete projects suspiciously quickly given the onerous bureaucratic hurdles most developers face. This focus on governance is commendable; although it may on occasion lead to short-term underperformance, in the medium to long term there are multiple examples of how firms with poor corporate governance deliver subpar returns to minority shareholders. While this is a bottom-up focused approach, at times the team has taken a view on the market by increasing their cash holding and rotating out of more cyclical industries. The fund is typically concentrated in the largest listed companies in India.
Discount and Fees
Shareholders can take some comfort in the knowledge that, while the board doesn’t operate a hard-and-fast rule with regard to discount management, it can and does take action should the discount drift out too far. Indeed, they have been very proactive since the end of 2011, when the discount widened beyond 10%. While the discount is in large part subject to fluctuations in the Indian equity market, the three-year average is in the region of 12.5% and on a six-month view it's similar. There is a continuation vote every five years.
JPMorgan is entitled to an annual management fee of 1% of net assets, reduced from 1.2% in Feb 2014. The fee is paid fully out of income. There is no performance fee levied here. In 2013 the fund's ongoing charges were 1.47% and we expect this to reduce a little in 2014 with the lower fee taking effect. The fund is some 60 basis points cheaper than its category median fund. It’s also cheaper than the SICAV version, JPMorgan India.
What About Gearing?
The managers are permitted by the board to have a maximum net exposure of 15%, but in reality, the gearing does not tend to exceed low-single digits. It’s used on a short-term tactical basis and to facilitate this there is a one-year floating rate $25 million loan facility in place with the Royal Bank of Scotland. Given recent volatility in the Indian equity market, they have generally refrained from using it too often. That said, they aren’t afraid to use gearing when they have conviction: In March 2013 there was modest gearing in use, which stayed in place until September.
