JPMorgan India Growth & Income’s (JIGI) effort to improve performance before a make-or-break tender offer in 2028 has been frustrated by the war in Iraq and the sell-off of software stocks, but with valuations attractive and the Strait of Hormuz set to reopen this week the outlook for the £376m investment trust is improving.
Half-year results show net asset value (NAV) fell 16.5% in the six months to 31 March with shareholders suffering a 17.6% decline as the share price discount to NAV widened slightly. It currently stands at 9%.
This was worse than the 12.4% decline in the MSCI India index, and while the level of underperformance is exaggerated by the benchmark not accounting for capital gains tax, an exchange-traded fund (ETF) measure that does accrue CGT liabilities only fell 9.8%.
Chair Jeremy Whitley said the higher quality smaller and medium-sized companies the company held had lagged cyclical, cheaper value stocks in the past year, while its overweight to IT companies and business software providers seen at risk from artificial intelligence (AI) had also hurt performance.
With India reliant on oil and gas imports, investor sentiment was hit by the energy shock arising from the Middle East conflict and fears over its impact on the country’s fast-growing economy. The previous financial year to last September was overcast by fears over US tariffs and high valuations of India equities.
Following a strategic review that saw the company become the first in its sector to start paying regular dividends last year, JIGI agreed to hold a 100% tender offer every three years starting in 2028. That could see the 5%-yielder wind up if assets fall below £150m.
In that context, fund managers Sandip Patodia and Amit Mehta are under pressure to improve performance with the portfolio having made an average 2% annual return over five years and 4.7% over 10 years. That trailed the MSCI India’s 5.5% and 8.7% returns, although again Whitley highlighted that a “significant part” of the underperformance was that the benchmark did not include the adverse impact of CGT during periods of strong markets.
Nevertheless, the managers have responded by pruning the portfolio around their higher conviction holdings, selling Hindustan Unilever and Bajaj Auto on their tepid growth and competitive challenges respectively.
They also exited Tata Motors’ passenger vehicles business which faced “multiple headwinds”, although they kept a holding in its commercial vehicles operation when the two parts de-merged.
Supreme Industries, India’s largest plastic processor, was also sold on valuation grounds as its profits came under pressure while digesting a recent acquisition.
In their place they added SBI Life Insurance; Eternal, the e-commerce group behind the Zomato and Blinkit platforms; Embassy REIT, India’s leading listed office investor; and Varun Beverages, the country’s largest PepsiCo bottler. They also bought into the flotation of Lenskart, a tech-driven eyewear company.
No changes were mentioned in their IT holdings such as Tata Consultancy, Infosys and Coforge which accounted for 9.1% of the portfolio at 31 May, a 1.4% overweight to the index.
The managers commented that “parts of the IT services sector are being priced as if AI will destroy their business model when we believe the opposite is true – these companies are essential enablers of AI adoption at enterprise scale.”
The fund managers acknowledged that India had underperformed other emerging markets due to its lack of “AI winners” and vulnerability to high oil prices. However, they were encouraged by signs of green shoots in credit growth, consumption and capital spending before the Iran war started.
“The recovery in India has been delayed by the Middle East crisis, not derailed, and the correction is finally creating the kind of bottom-up opportunities that elevated valuations had denied us for the past two years,” said Patodia and Mehta.
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