And despite experiencing a 30 per cent sell-off at the height of the first wave of the pandemic, the stock market had recovered by October 2020 and has since gone on to deliver stellar returns, more than doubling investors’ money since the lows of March 2020.
Today, after such a good run, the market is certainly not cheap. But valuations are justified according to Mike Sell, manager of the Alquity Indian Subcontinent fund – this week’s Best in Class – who also says that India deserves to be a core investment, not simply an add-on.
“The unparalleled multi-decade growth outlook for India means that the country should be a permanent feature in investors’ long-term portfolios,” he says. “The India of tomorrow will look very different to the India of even a decade ago; portfolios must therefore reflect new India.”
Sell is head of global emerging market equities and has more than 25 years’ experience investing across the asset class. He has run this fund since launch and, in a table of more than 5,000 funds – the top of which was dominated by oil and gas exchange-traded funds – the Alquity Indian Subcontinent fund was the ninth best-performing fund of 2021, returning more than 44 per cent. No pressure going into 2022 then.
Alquity is a specialist emerging and frontier markets investment business. It is a strong proponent of active management and operates differentiated portfolios, often with high conviction and low turnover. Just as important to the investment angle is its responsible investment approach.
Since the launch of the business in 2009 it has used the business for social good: all of the business's portfolios are aligned to the UN social development goals, and the business donates 10 per cent of revenues to high-impact projects in the regions the funds invest, through the Alquity Foundation. So far it has awarded more than $2mn (£1.5mn) to help transform more than 65,000 lives.
For example, in India, Alquity has a Transforming Lives project called Phool (Hindi for flower). It is a social enterprise that employs women from the lower social and economic strata to collect used flowers from temples and recycle them into incense sticks. It now employs more than 300 women and recycles tonnes of flowers that would otherwise pollute the rivers when discarded by the temples.
Uniquely, Alquity also runs consumer panels with some of these women to help analysts understand their priorities, concerns and how they make spending decisions. This information helps shape the research agenda, which then informs the highly selective holdings in this portfolio.
The process starts with a no-compromise approach to environmental, social and governance considerations, which means that more than 30 per cent of Indian companies are excluded from this fund’s universe – including one of the biggest index positions, Reliance Industries.
But this still leaves a very large pool of businesses from which to choose and Sell likes to look lower down the market cap spectrum than many peers, for the companies best connected to the growing domestic Indian market. He has three core themes in the stocks he wants to invest in: monetisable structural growth, cyclical positioning and sustainable competitive advantage.
Sell then separates out the best, well-managed companies trading on attractive valuations. He will perform a deep-dive analysis to understand the current picture of the company, as well as modelling forward to help understand the inherent value of the business, and what it could be worth in the future.
Company meetings are an essential part of the process and Sell will never invest in a company when he, or a member of the team, has not met the management.
After investment, there is a continual review process for each stock, whether this be on the company itself, the broader industry, or the wider economic picture to make sure the investment case and the drivers for potential outperformance are still in place. Stocks are held for around three to five years.
The overall portfolio will have between 30 to 50 holdings, with position sizes between 1 per cent and 10 per cent, meaning there is high conviction. However, all positions that are more than 5 per cent cannot total more than 40 per cent to ensure there are not too many concentrated bets. This means that active share is likely to be considerably above 70 for the fund.
This fund is not for the faint-hearted, but when coupled with Alquity’s excellent responsible investment approach, over the long term I think it makes a great investment for both the soul and the pocket.
Darius McDermott is managing director at FundCalibre
