abrdn IFN Fund Update - February 2024

In this episode, we sit down with James Thom, a manager on The India Fund, Inc. 

IFN’s top ten holdings as of November 2023: 

ICICI Bank Ltd 7.6 

HDFC Bank Ltd 7.5 

Hindustan Unilever Ltd 5.2 

Infosys Ltd 5.2 

Bharti Airtel Ltd 4.7 

UltraTech Cement Ltd 4.2 

Power Grid Corp of India Ltd 4.1 

SBI Life Insurance Co Ltd 3.8 

Larsen & Toubro Ltd 3.7

Tata Consultancy Services Ltd 3.4 

Transcript

00:00:00:00 - 00:00:29:10

Mike

Welcome to the latest podcast for the India Fund Ticker Symbol IFN. And I'm Mike Taggart, Aberdeen's US closed end funds specialist. Today we have James Tom, senior investment director of Asian Equities at Aberdeen and a portfolio manager on AFN. James, thank you for joining us today. 

James

Great to be with you, Mike. 

Mike

Now most investors listening understand the potential for growth in Indian stock markets.

00:00:29:12 - 00:00:52:11

Mike

The most populous nation on the planet, the rise of a highly educated middle class and all of the economic dynamics stemming from that. In which specific segments is the India fund poised to benefit from India's growth? 

James

So at this point in time, I think there are three key kind of themes that we're excited about. And positioned around in the India fund at the moment.

00:00:52:11 - 00:01:27:22

James

And those three themes are the residential real estate cycle, the CapEx and infrastructure spending cycle and the credit cycle. And I highlight these three because they are all at a sort of interesting inflection point. All have been in a pretty subdued, subpar kind of level for for quite a number of years now. So if you take the residential real estate cycle, it's been through a prolonged kind of 7 to 9 year downturn.

00:01:27:24 - 00:02:00:15

James

And now we've got a situation where inventory levels are the lowest they've been in a very long time and prices are moving and sales are accelerating very rapidly. And we are in maybe the sort of second year or so of a what should be, we believe, a prolonged upcycle for residential real estate. So we are positioning around that as one theme on the infrastructure side, it's slightly different.

00:02:00:15 - 00:02:34:20

James

It's very much tied to what the government of India is doing. They have increased the amount of expenditure going into CapEx and infrastructure development by about a third for the last three years, and that's driving a material increase in projects and programs across a range of different areas. So plenty going on there. And then on financials similar to the real estate cycle, we've had a prolonged downturn in terms of credit growth and now finally it's coming back.

00:02:34:20 - 00:03:06:24

James

So so we're well positioned in the banks and non-bank financial companies as well. 

Mike

This all sounds very, very positive. But, you know, with all of the enthusiasm for the India growth story, I have to imagine that, you know, valuations are getting stretched at this point. Or is that not the case? 

James

No, I think that's fair. I mean, it's important to remember that India has always traded at a premium to other Asian markets and most of the rest of the world.

00:03:07:01 - 00:03:35:12

James

And so some of that is justified. You're paying, obviously, for that long term growth potential and all the attractions of the market that you just highlighted earlier. But that premium has widened over the last couple of years and India has outperformed the rest of Asia over over that period. So you are paying more than you were. And certain parts of the market are looking a bit frothy.

00:03:35:13 - 00:04:07:13

James

We saw last year, for example, a very strong rally in the small and mid-cap segments of the market. So certainly valuation multiples are feeling quite stretched there are maybe large caps a little bit more reasonable on a relative basis. So I think it's important to a, you know, take a long term view and not go into investing in India with with a sort of short term expectation and be just be selective in your stock picks and and cautious on valuation where you can.

00:04:07:15 - 00:04:31:08

Mike

So as a follow up, James, since it sounds like it's hard to find good valuation for securities in the market currently, you know, can you just remind us of the investment approach that your team takes when selecting securities for the India Fund? 

James

Yes. So I think first and foremost, we are a quality investor. So we are trying to identify the best quality companies in India.

00:04:31:08 - 00:05:00:21

James

And what I mean by that, well, typically these are, you know, market leaders in attractive industry segments with decent growth potential. They will have a track record of strong profitable growth, good management teams, usually higher than normal kind of margins and return metrics and also strong ESG credentials and so that's what we're looking for. And sometimes that does mean that we're prepared to pay a premium for quality.

00:05:00:23 - 00:05:29:14

James

And our philosophy and view is that quality tends to be synonymous with long term compounders. And often, even if you're paying what seems to be a full price today, these long term compounders can be undervalued on the full scale of quality and value of those stocks isn't recognized over through the cycle and over the longer term. So so we try and be sensible on valuation.

00:05:29:16 - 00:05:52:12

James

It is possible to be a bit contrarian. Look at sectors that are perhaps less in the in the sort of hot zone and try and find value there. You can go down the market cap spectrum and find under-researched companies where maybe there's quality, but but, but the value is still not been fully kind of understood and recognized by the market.

00:05:52:12 - 00:06:15:12

James

So that's really how we approach it. And think about it. 

Mike

You and your team are based in Singapore. How often do you get, you know, shoes on the ground in India? What types of due diligence do you perform and what do you look for in companies and corporate governance before you invest? 

James

Yeah, So Singapore's not not so far from India, so it's a relatively easy trip for us to make.

00:06:15:12 - 00:06:50:19

James

And we do that as a team four or five times a year. I myself was just over there in December in both Mumbai and Delhi. And the aim really of those trips is to meet with a combination of companies that we already hold in the portfolio and do our sort of regular checks, if you like, to make sure that our investment thesis is kind of tracking in line with expectations and to to meet with the management teams and then also to supplement that with meeting with new ideas and potential kind of candidates for the for the portfolio.

00:06:50:21 - 00:07:14:14

James

And as I said, you know, we are a quality investor. And so fundamental to our process is that meeting with the company and with the management teams kicking the tires and trying to a I guess just get comfort that you know, what you read about in the disclosures and so forth is real. The assets of that, the companies there, the people are there.

00:07:14:16 - 00:07:41:01

James

But you also have the opportunity to pick up on some of the kind of softer elements and less tangible elements by visiting companies yourself, you know, things like just how the business is run, what the culture's like, is it, you know, is it sort of frugal or slash, you know, is it is it a place that's got gold taps in the bathroom and maybe is being a little careless with shareholder funds, or is it a professionally run kind of sensible looking operation?

00:07:41:01 - 00:08:04:18

James

So so these sorts of things we find invaluable. 

Mike

It's an election year in India as it is in the U.S. And, you know, the current feeling here in the U.S. is that this could go one way or the other. You know, if one side wins, country heads in one direction, if the other side wins, country heads in the opposite direction is it the same in India or will the economic growth continue regardless of the election outcome?

00:08:04:20 - 00:08:42:11

James

It is it is different. Firstly, because I think the kind of political pictures very different. It's the polls would suggest that it is Prime Minister Modi's election to win and that he's highly likely to secure a third term and it would be a surprise, therefore, if if he didn't. So there's much less kind of uncertainty there. You know, at worst, maybe he loses his majority and then you get into a slightly more complex coalition type structure, and that might have an impact on the ability to kind of implement policy.

00:08:42:13 - 00:09:09:18

James

But, you know, never say never if if the opposition Congress were to were to prevail at the election in May this year, then I think we would see possibly some rolling back of the kind of infrastructure story that I mentioned as one of the sort of attractive themes at the moment in India. But even there, my sense is quite a bit of this kind of infrastructure spend is is now sort of strategic in nature.

00:09:09:19 - 00:09:38:20

James

It's kind of tied to geopolitics, it's tied to the energy transition that's tied to sort of the supply chain diversification out of China. So I suspect even there quite a bit would be kind of business as usual. I would see continuity. 

Mike

Excellent. And, you know, finally, investors have many choices when it comes to investing in India. So from your portfolio management perspective, what are the benefits of active management in India?

00:09:38:20 - 00:10:14:17

Mike

And you know, especially in the closed end funds structure? 

James

So I'm a firm believer in in active management, particularly when it comes to a market like India, where it is so easy to kind of lose your shirt where things like kind of corporate governance so, you know, vital to your due diligence process and stock selection process. India, like many other Asian markets, is a country where you typically have one single dominant shareholder that it's important that you kind of run your checks on you.

00:10:14:17 - 00:10:40:01

James

You get comfortable that they're going to be good custodians of your capital and not not kind of overlook minority shareholder interests. And so an active approach is is just fundamental to to that really. And I think it also gives you that opportunity to, as I said, kind of hunt for under-researched companies where value is perhaps not fully appreciated.

00:10:40:01 - 00:11:09:24

James

But but you can still find really good quality and a closed end structure will allow you the flexibility to do that as well. So to sort of go down that market cap spectrum, to take a bit more liquidity risk because you've got that kind of permanent capital base and to find some hopefully really great quality companies in that part of the market, which will drive long term returns for you and then all the other benefits that come with with a closed end fund really.

00:11:09:24 - 00:11:32:18

James

So not having to manage to kind of daily flows that permanent capital. I mentioned the ability to to invest at a discount sometimes to to innovate and to benefit from quarterly distributions as well. 

Mike

Excellent. Well, thank you so much, James, for that update on Life and the India Fund. It's always a pleasure hearing from you. 

James

Thanks very much, Mike.

Mike

And thank you, everyone for listening to this podcast.

00:11:32:20 - 00:12:19:21

Mike

There are three convenient ways to learn more about IFN on the internet. Visit A, B, R, D, N, IFN.com. Email us at investorrelations@abrdn.com, or give us a call at one 800 5225465. I'm Mike Taggert of abrdn. Thank you for listening.

00:12:19:23 - 00:12:46:24

Unknown

This podcast is provided for general information only and assumes a certain level of knowledge of financial markets. It is provided for informational purposes only and should not be considered as an offer, investment recommendation or solicitation to deal in any of the investments or products mentioned herein and does not constitute investment research. The views in this podcast are those of the contributors at the time of publication and do not necessarily reflect those of Aberdeen.

00:12:47:01 - 00:13:13:18

Unknown

The companies discussed in this podcast have been selected for illustrative purposes only or to demonstrate our investment management style and not as an investment recommendation or indication of their future performance. The value of investments and the income from them can go down as well as up, and investors make it back less than the amount invested. Past performance is not a guide to future returns, return projections or estimates, and provide no guarantee of future results.

IFN’s top ten holdings as of November 2023: 

ICICI Bank Ltd 7.6 

HDFC Bank Ltd 7.5 

Hindustan Unilever Ltd 5.2 

Infosys Ltd 5.2 

Bharti Airtel Ltd 4.7 

UltraTech Cement Ltd 4.2 

Power Grid Corp of India Ltd 4.1 

SBI Life Insurance Co Ltd 3.8 

Larsen & Toubro Ltd 3.7

Tata Consultancy Services Ltd 3.4