Finding value among investment trusts is increasingly hard but in unpopular areas you can still find opportunities. These include New India Investment Trust (NII) which has moved out to a discount to net asset value (NAV) of more than 16 per cent, in contrast to its 12 month average of 13 per cent, and around double what it was when we tipped the trust in January 2012.
- Wide discount to NAV
- Good performance record
- Assets at attractive valuation
- India potential
- Good managers
- Volatility
- Emerging markets risk
IC TIP RATING
Tip style: GROWTH
Risk rating: HIGH
Timescale: LONG TERM
The investment trust has suffered partly as a result of volatility in the Indian market and a fall in the rupee against the pound last year. "But for investors willing to take a contrarian view on a market that has been out of favour the discount to NAV at which the shares currently trade is wide by historical standards and may provide an attractive entry point," says Innes Urquhart, analyst at Winterflood.
Although challenges ahead include possible further currency weakness and a general election in the second quarter of this year, these are being reflected in market valuations, according to Mick Gilligan, head of research at broker Killik & Co. "The Bombay Stock Exchange 500 Index is trading on 14.3x this year's earnings despite earnings growth expectations of 20 per cent this year and 18 per cent next year," he says. "The risks are also being reflected in the trust's discount which has widened from 11 per cent a year ago to the current 16 per cent level."
The Indian market's true value is hidden by a number of index heavy companies trading at elevated multiples, according to Kunal Desai, fund manager at Neptune Investment Management, who points out that 90 per cent of companies are now trading below their long-term price to book multiple.
New India, meanwhile, has beaten its benchmark in both NAV and share price terms over one, three and five years, as well as sector peers JPM Indian (JMC) and India Capital Growth (IGC). The trust is run by Aberdeen Asset Management's emerging markets team, led by Hugh Young, one of the most experienced managers in this area. Aberdeen's emerging markets and Asian funds in general have strong track records and we include a number in our IC Top 100 Funds.
As well as risks being priced in, there are expectations that longer-term things can turn up in India. Economists at asset manager Schroders say that they expect India's May election to provide the impetus for reform, "sowing the seeds for improved growth in 2015, while 2014's numbers should be supported by cheaper commodities and a continued export recovery on the back of currency weakness".
Risks remain for investors in India, for example inadequate infrastructure, inflation and corruption. "On the domestic front, the outcome of the 2014 elections is crucial and investors will remain wary in the interim," adds New India's investment team. "The large-scale economic investment that is essential to tackling India's current malaise cannot proceed without a willing and able government. Given these factors, further market wobbles would not be unusual."
But New India's portfolio has a quality bias which should mitigate Indian market risks.
The trust has a performance fee, however basic and performance fees are capped at 1.75 per cent. The current ongoing charge of 1.56 per cent is reasonable for a specialist single country fund.
A good way to access a lowly valued market is via an investment trust at a discount to net asset value (NAV), because if the assets do well, then the share price could also rise, meaning investors benefit from both a rising price and a narrowing discount.
So for long-term investors looking to invest in a major emerging market while it is still reasonable value, New India Investment Trust is worth consideration. Buy.
Read more on why it is a good time to buy India
NEW INDIA INVESTMENT TRUST (NII) | |||
PRICE | 205p | GEARING | 99% |
AIC SECTOR | Country Specialists: Asia Pacific | NAV | 242.06p |
FUND TYPE | Investment trust | PRICE DISCOUNT TO NAV | 16.05% |
MARKET CAP | £120.8m | YIELD | 0.00% |
No OF HOLDINGS | 37* | ONGOING CHARGE | 1.56% |
SET UP DATE | February 1994* | MORE DETAILS | www.newindia-trust.co.uk |
Source: Morningstar, *Aberdeen.
1 year cumulative share price return (%) | 3 year cumulative share price return (%) | 5 year cumulative share price return (%) | |
New India Ord | -8.89 | -24.63 | 76.72 |
India Capital Growth Ord | -18.21 | -44.98 | 10.48 |
JPMorgan Indian Ord | -14.61 | -32.80 | 29.28 |
MSCI India GR USD | -9.15 | -27.80 | 51.29 |
Morningstar as at 6 January 2014
TOP TEN HOLDINGS as at 30 November 2013
Infosys | 9.3 |
Housing Dev Finance | 8.2 |
Tata Consultancy Services | 7.8 |
ICICI Bank | 6.3 |
Hero MotoCorp | 3.7 |
ITC | 3.7 |
Godrej Consumer Products | 3.7 |
Ambuja Cements | 3.3 |
Hindustan Unilever | 3.2 |
HDFC Bank | 3.1 |
Sector breakdown
Financials | 21.1 |
Information Technology | 20.9 |
Consumer Staples | 13.3 |
Materials | 13.2 |
Health Care | 7.8 |
Consumer Discretionary | 6.7 |
Utilities | 4.1 |
Industrials | 3.4 |
Telecommunication | 1.5 |
Cash | 8 |