Investors are often warned against judging funds on their short- or medium-term performance, with analysts pointing out a strong record over three or five years may be down to its style temporarily moving back in favour or a couple of lucky stock-picks, rather than the sort of skill that could see it consistently win out over a variety of market conditions.
Worse still, it may simply be rebounding from a woeful period of performance and, on first glance, this certainly seems to be the case with India Capital Growth. The trust has made 187.32 per cent over the past seven years, significantly ahead of its S&P BSE (Bombay Stock Exchange) Mid Cap benchmark, the MSCI India index and the only other comparable funds in its IT Country Specialist: Asia Pacific ex Japan sector: Aberdeen New India IT and JP Morgan Indian IT.
Performance of trust vs peers and indices over 7yrs
Source: FE Analytics
Looking at the long-term figures, though, a different picture emerges. While all the trusts and indices mentioned above have made
around 200 to 300 per cent since the launch of India Capital Growth in 2005, the trust is still in negative territory over this time.
Performance of trust since launch vs peers
Source: FE Analytics
However, David Cornell (pictured), chief investment officer and managing director of Ocean Dial Asset Management, pointed out investors should not judge the trust on its performance since launch, but since 2012, as the way the trust is run has been completely transformed since his firm was awarded the mandate
.
“I took over the fund in January 2010 and the investment philosophy back then was, you buy quite large stakes in quite small companies,” he explained.
“Not a controlling stake, but you might take a board seat, so it’s kind of quasi-private equity.
“From 2005 to 2007, that worked really well. And then post the financial crisis when the market collapsed, these things got hit like... well, you can imagine.”
India Capital Growth’s maximum drawdown over this time was 82.56 per cent and it ended up trading at less than a quarter of its launch price at one point. The bad news didn’t end there – Cornell said India came out of the crisis “smelling of roses” with little in the way of leverage compared with the rest of the world, and its stock market rebounded quickly in 2009. However, with no liquidity in the trust’s holdings, the manager said they remained “rooted to the floor”.
“When I inherited the portfolio in 2010, I had eight stocks in the portfolio, all of them illiquid, untradeable rubbish,” he continued.
“I had to go to the shareholders at that point and say, ‘look, we're going to do a massive overhaul of this portfolio, we’re going to rewrite the investment philosophy, rewrite the investment process, we’re going to sell everything we've got in the portfolio, and we’re going to start again’. And they said, ‘well, we don't have a lot to lose, so go for it’.”
So, if Ocean Dial took charge in 2010, why is Cornell asking investors to judge him on performance since 2012?
The manager said this is because the illiquid nature of the holdings back then meant they took two years to sell. For example, it still holds one stock that was bought by the previous management, Arihant Foundations and Housing, but this is only because it would take 2,425 days to completely exit.
“It’s 20 basis points in the portfolio, so it doesn’t matter,” Cornell explained. “But I can’t write it down, I can’t write it off because it still trades. And I can’t sell it.
“I had eight of these in the portfolio at that stage. And so we killed the NAV for two years, because we were selling stock into a falling market.”
Ocean Dial believes that the best way to generate returns in India is investing in companies well placed to benefit from the structural growth potential of the domestic economy. Cornell said what worked out well when he handed over the portfolio to Gaurav Narain in 2011 was that he had built cash levels up to 60 per cent, allowing the incumbent manager to invest in quality consumer names such as Emami and Eicher Motors which were at the time trading on low double-digit earnings multiples. These now trade at about 30 to 35 times.
Source: Ocean Dial
“We were able to use the cash quite wisely,” added Cornell. “And that’s why you see the performance of the portfolio starts recovering in about 2012.
“It’s been a labour of love, this,” he continued. “I mean, we were subscale. We were kind of like the third bog washer in a hamlet, you know, completely irrelevant. One line in a major play.
“It’s been quite a long journey to build back investor confidence. If you look at it over 10 years, you will see it lags the market by quite a substantial margin. From our perspective, we’ve stopped apologising for that now, because we've demonstrated seven years of good performance.
“And I think everyone can see that since 2012, it’s done a lot better.”
In a previous article published on FE Trustnet, Cornell said there are two reasons why India differs from other emerging markets – its size and its growth rate.
“There are 1.3 billion people that live in India and 50 per cent of them are under the age of 25,” he said. “The dependency ratio, which is the number of non-working people per 100 working people, is falling and that means that any income generated can be mobilised for consumption as opposed to anything else.”
The trust is on a discount of 9.14 per cent compared with 12.61 and 15.46 from its one- and three-year averages. It has ongoing charges of 1.91 per cent and is not currently geared.