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India-Focused Fund's Manager Strikes Optimistic Tone
Tom Burroughes
26 April 2021
India has had its share of problems – such as a surge in coronavirus cases – but underlying forces are set fair for robust, broad-based growth which investors cannot afford to ignore, a fund manager says. Narain, who is based in Mumbai, has worked in the industry for more than 25 years, starting on the sell side before moving to the buys side. He has been at Ocean Dial since 2011. Prior to that, he was at ING Investment Management and previously SG Asia Securities.
Gaurav Narain, who is head of equities at , and fund advisor of the India Capital Growth Fund, is unsurprisingly bullish about India but argues that he has plenty of reasons for his ebullient stance.
“The next five years are going to be the best growth period for India…there have been so many structural reforms that will be very good for growth going forward,” he said.
The Indian economy is diversified; no single sector dominates the country, as is the case with some other Asian countries. Also, no single company dominates a sector – another contrast with some countries, he told this news service in a recent call. The fund also shies away from firms that operate in a government-controlled/dominated sector, where governance can be a problem.
The fund looks for firms which are able to generate double-digit earnings growth. For example, Narain likes consumer sector businesses and these account for about 24 per cent of the fund’s entire portfolio. Narain also likes financial services firms, such as private sector banks (not those which are still under the protection of the government). In fact, they make up 20 per cent of the fund’s portfolio (total net asset value of £119 million).
“Private banks are growing by healthy double-digits and these are competing with inefficient government-owned banks,” Narain said. Asked why financials account for a big chunk of the fund, Narain said that after a tough economic period followed by an initial set of reforms post-2016, the financial services sector managed to ride through the COVID-19 pandemic without a great deal of pain, suggesting that a good deal of the changes required had been made already.
“Banking has actually come out of this pretty well,” he said.
This news service interviewed Narain at a time when India, while beset with some of the struggles facing emerging market countries, is seen to some extent as benefiting from a pivot in global supply chains from China. Traditionally strong in areas such as software and agriculture, the country’s economy has been shaken up by the Narendra Modi-led administration, whether it has involved cracking down on unregulated cash transactions, strengthening banks or, controversially, its proposals to reform agriculture – raising questions about price guarantees. (Such proposals have prompted weeks of protests in the country.)
With its relatively youthful demographics, rising affluent middle class and a hunger for consumer goods, portfolio managers such as Narain see a lot of upside.
Most of the people he works with at Ocean Dial are in Mumbai, with one analyst based in London. The London-listed fund, domiciled in Guernsey, adopts a bottom-up, stock-picking, long-term approach. The fund, whose inception date was 22 December 2011, is benchmarked against the S&P BSE MidCap TR Index.
In performance terms, the rebased net asset value of the fund (excludes the dilutive effect of newly-issued shares in August 2016) shows a 28.3 per cent rise over one year to February this year, against 26.3 per cent for the benchmark. Over six months, the figures are 33 per cent and 31.9 per cent, respectively. It has lagged the benchmark over five-years, however. (Source: February factsheet).
Narain is a long-term investor, noting that “any investment we buy is something we think about buying and holding for three to five years.”
The fund’s team looks at thousands of firms and narrows them down, via a variety of filters, to a universe of about 150 firms. The team regularly meets the firms it invests in to get to know the management. “We eliminate businesses that are too complex or that don’t have a particular edge,” he said.
Besides its chunky allocations to financial services and consumer sector firms, 7 per cent of the fund is in automobile ancillary businesses; 7 to 8 per cent of the fund is in healthcare and speciality chemicals, and another 7 to 8 per cent is in cement and gas utilities.
Although Narain wants to avoid firms affected by government, he achieves exposure to public infrastructure growth by holding sectors such as cement producers, for example.
Looking ahead, Narain expects the fund to gain more exposure to cyclical businesses, such as through banks and industrials.
As for risks, Narain said that India has a high dependence on oil imports with almost 80 per cent of its oil requirement met through imports. Any surge in oil prices has an impact on most macro indicators such as current account (currency takes a hit) and fiscal figures of the government.