IFN Fund Update - August 2023

In this episode we focus on Indian equities with a manager of The India Fund, ticker IFN. 

Transcript

Paul Blane: Hello, everyone, and welcome back to the latest in the abrdn Closed-end Fund podcast series, where we catch up with our portfolio managers from around the globe to gain some perspective on the state of the markets and the abrdn closed-end funds. I'm your host, Paul Blane, Senior Director with the National Accounts Team, and today we're focusing on the abrdn India Fund (ticker – IFN). It's my pleasure to welcome Yoojeong Oh, Investment Director with the abrdn India Equity Fund. Yoojeong, thanks for being here. It's great to see you. 

Yoojeong Oh: Thank you for having me.

Paul: Absolutely. So maybe we could start, if you would, with a general overview of the markets, in particular the India equity markets, and how it might relate to the closed-end fund space?

Yoojeong: So, the start of the year has really been a game of two halves. India underperformed until March, really led by the concerns and risks around the Adani Group companies. But since then, it’s been one of the top performing markets in the region, helped by foreign inflows keen for growth opportunities, especially outside of China. Domestic economic conditions look good - we are seeing signs of industrial CapEx picking up, which should circle back into the economy via wages and consumer spending in a couple of quarters. Input cost inflation has also come off peaks and is helping to drive consumption, although we are a little bit mindful of food price inflation that can be really quite meaningful in India. Evaluations as a result are probably a little bit stretched given the strong performance seen in the last quarter, so that's something also to bear in mind. 

Mid-cap companies in particular have seen significant share price gains and we're seeing quite modest earnings growth expectations. So, market enthusiasm may perhaps be overly optimistic on what some of these companies can deliver. However, longer term, we think India remains a very attractive market with structural growth based on favourable demographics, consumer premiumization and growing MIC in India initiatives. And this is all very doable, of course, if you think about 20% of the world's working population being based in India. India is also the factory to the world. So, the efforts to remove bureaucracy and encourage manufacturing in India has coincided with a lot of global MNCs looking for China plus one diversification strategies. And India also has a steady stream of graduates, and the skills mix in India is shifting from that low-skilled labour in textiles and apparels to higher-skilled engineering, electronics and pharma related roles. Also, worth bearing in mind is that India is going to have elections next year, and many of our holdings and other market experts that we speak to are forecasting for more of the same. So, that's good for policy stability as well. 

Paul: Shifting gears just a little bit, could you share just briefly a little detail about how the India Fund is managed?

Yoojeong: So, the India Fund, the IFN, is managed by myself and James Thom. We're both located in Singapore, but we are frequent travellers to India. We apply the same bottom-up stock picking process that abrdn is known for. So, we're looking for quality companies with good business franchises, cash generative operations and a robust balance sheet. And since travel opened up at the end of last year, we've been making regular trips out to India to meet with our holdings and catch up with what's been going on, as well as to hunt out new ideas. I'll be going back in November, which should be an exciting time after the Indian festive season and also closer to the elections, so that we can get some updates from our corporates again. 

Paul: So, where are you finding opportunities that you feel are most relevant to IFN?

Yoojeong:  Yeah, so at the moment we like companies exposed to capital expenditure as discussed earlier. In this space we own a large-scale infrastructure company that's been seeing positive growth in their order wins with projects in both the domestic and international market. 

One of the benefits of a closed-end fund structure is our ability to move down the market cap scale. So, still within the same infrastructure sector, we also recently initiated a small-cap company which makes cables and wires for construction projects, and this is already one of our top performance contributors within the fund. And if we stick in the small-cap space but move to real estate and this sector, I think, is a great example of where due diligence can really help identify the quality companies, as these real estate companies operate in the prime property areas, where pricing and demand have been robust, and have prudent balance sheets that have been through various macro cycles.

So, even in the sectors that haven't done so well within the past quarter, that was really driven by this growth investment style, we still find companies that offer attractive growth over a longer-term time horizon - these companies are giving us exposure to that Indian consumer and their aspirational growth story.

Paul: A slightly broader question, what do you feel are the benefits of active management?

Yoojeong: I think active management again plays a very important role in a market like India, where quality can be very different between the two opposite ends of the scale. So, if you look at this fund, IFN, we're not looking to replicate the benchmark. We're really trying to add value to our investors through stock picking to find the best quality companies, regardless of sector or benchmark position. Some of our largest active positions are not owning the big benchmark weight such as Reliance, which is currently around 9% of the benchmark, as well as some of the Adani companies. We don't own any of these two large benchmark companies on governance concerns, as well as the disconnect between fundamentals and valuations. You know, essentially, we're looking for good business models, good cash flow generators and good dividend payers. I think a common important theme is to find trustworthy management teams that have a track record of execution and sensible capital allocation. So, this good management team sets up the necessary operational framework to build long-term sustainable businesses that promote both employee and community welfare as a core part of doing business - which is essentially having good ESG principles. So really, I think a poor management team that makes it difficult for us to trust company guidance or makes it difficult for us to model future cash flows is where we would describe no-go areas for us. 

Paul: My final question is centred around the investors listening today. Why do you think they should consider allocating to the India equity space? 

Yoojeong: Yeah. So, I really believe that India remains home to some of the best companies in the world and applying a quality focused investment approach is a good way to pick out the right stocks that will benefit from the longer-term structural growth trends that India offers.

Paul: Thanks, Yoojeong, it’s been great speaking with you today. We really appreciate you sharing your insights. 

Yoojeong: Thank you very much. 

Paul: So, for those interested in learning more about the abrdn India Fund (ticker – IFN), you have 3 options to contact us - visit us at abrdn.com, that's abrdn.com, email us at investor.relations@abrdn.com or call 1800-522-5465. Thanks again, Yoojeong.

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