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New dawn for New India

India is being touted as the contrarian emerging market play for investors
January 26, 2012

Last year was a tough year for all emerging markets; almost without exception, they fell by more than developed markets. And India fell more than most - almost 25 per cent, as measured by the Sensex. Political uncertainty, slowing growth and a depreciating currency were the key factors behind that. The fall has left India looking arguably the cheapest major emerging market.

IC TIP: Buy at 218.5p
Tip style
Growth
Risk rating
High
Timescale
Long Term
Bull points
  • Potential for India market rally
  • Good fund managers
  • Strong performance record
Bear points
  • Emerging markets risk
  • Volatility

And it's one that's less exposed to problems elsewhere, such as the eurozone, than other emerging markets like China. "The Indian economy is less dependent on exports than its neighbours," says Edward Bland, head of investment research at Duncan Lawrie Private Bank, who regards India as "a contrarian buying opportunity."

India's greatest potential comes in the form of its burgeoning young workforce - by 2025, it is forecast that the country's population should be greater than China's. And like China, India is also building infrastructure and investing heavily in capital projects.

Its capital markets are also more open. India's decision to allow investors not registered as a foreign institutional investor to buy equities as qualified financial investors has made headlines this year. "This forthcoming change should help to broaden the shareholder base and attract a greater fund flow, reducing volatility and strengthening the currency," says David Cornell, managing director of fund managers Ocean Dial Advisors India.

"I believe that the fall in the equity index over 2011, alongside the depreciation of the rupee (down 19 per cent against the US dollar) leaves equity valuations at a very attractive entry point for investors," adds Avinash Vazirani, manager of the Jupiter India Fund.

Read more on the investment case for India

India's strong fundamentals and steep stock market falls present an attractive opportunity. And a good way to access a lowly valued market is via an investment trust at a discount to net asset value (NAV). If the trust's assets do well, then its share price could also rise in relation to the assets, meaning investors benefit from both a rising price and a narrowing discount.

The best-performing India investment trust over recent years has been New India, which has outperformed its benchmark, MSCI India, over one, three and five years both in terms of share price and NAV. New India is at a discount of around 8 per cent, which has been its average for the last 12 months.

The trust is run by Aberdeen Asset Management's excellent emerging markets team, led by Hugh Young. Mr Young is arguably one of the most experienced managers in this area. The team use Aberdeen's equity stock-picking process: original research, businesses the team understands, and management of downside risks via price discipline.

The trust's managers try to add value by identifying quality securities with good management and business models that are attractively priced. They downplay the benchmark when constructing the portfolio because they think it provides few clues to future performance.

The managers always visit companies before investing. They have a long-term focus, looking to buy and hold, rarely focusing on short-term returns, adding gradually during dips and taking profits when share prices rise.

The trust has a highly concentrated portfolio of 27 stocks that in theory is riskier than a larger number of holdings, although so far this high-conviction approach has translated into outperformance. India's markets are volatile, an effect that may be amplified by movements in the sterling-rupee exchange rate. And New India's total expense ratio of 1.6 per cent is higher than some investment trusts, although it is still cheaper than open-ended India funds such as First State Indian Subcontinent, which charges 1.96 per cent. So, if you're attracted by the long-term fundamentals, the managers' track record and the discount to net assets, and you have the stomach for the risks and volatility, this could be a fund worth considering. Buy.

NEW INDIA INVESTMENT TRUST (GB0006048770)
PRICE:218.5pGEARING100%
AIC SECTOR:Country Specialists: Asia PacificNAV:236.27p
FUND TYPE:Investment trustPRICE DISCOUNT TO NAV:8.26%
MARKET CAP:£127.89m1-YEAR PRICE PERFORMANCE:-13.14%
No OF HOLDINGS:27*3-YEAR  ANNUALISED PRICE PERFORMANCE:26.78%
SET UP DATE:Feb-945-YEAR ANNUALISED PRICE PERFORMANCE:9.23%
BETA:0.7*TOTAL EXPENSE RATIO:1.60%
TRACKING ERROR:12.6*YIELD:0.00%
STANDARD DEVIATION:22.6MORE DETAILS:winvtrusts.co.uk

Source: Morningstar & *Aberdeen.

Performance data as at 23 January 2012

Top 10 holdings (as at 30 November 2012)

Infosys Technologies10.3
HDFC9.8
Tata Consulting Services8.7
ICICI Bank7.0
Hero MotorCorp4.9
Hindustan Unilever4.3
Bosch3.7
ITC3.6
Grasim3.5
Ambuja Cements3.4

Sector allocation

Information technology23.5
Financials20.1
Consumer staples13.9
Materials11.0
Consumer discretionary8.6
Health care7.7
Utilities7.4
Industrials4.0
Telecommunication services2.6
Cash1.2