It’s a good rule of thumb to avoid new investment-trust issues until they have proven themselves. Still, there are always exceptions. In my experience, the most reliable trusts are launched in tough times. The Ashoka WhiteOak Emerging Markets Trust (LSE: AWEM) launched earlier this year, raising £31m, is a good example.
Ashoka launched its Ashoka India Equity Investment Trust (LSE: AIE), managed by the same investment team, in July 2018 with just £46m. Since then, it has returned 131% against 74% for the MSCI India index, making it the best performer of the Indian trusts. Assets have grown to £263m.
Prashant Khemka, the manager of both, spent 17 years at Goldman Sachs, where he built the India and emerging-markets funds, managing up to $5bn. He left to found WhiteOak in 2017 and based his team of 45 in India, giving them a competitive advantage. “India has high alpha [meaning there is a relatively large scope to gain returns in excess of the benchmark] and we have unparalleled expertise there,” he says. Khemka expects the 20% of AWEM invested in India to contribute nearly as much added value as the rest of the portfolio put together.
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Another area of high alpha is small and medium-sized companies. Khemka estimates there are 3,000 with market values over $500m available worldwide, including 600 to 800 in India – 1,000 if the cut-off is applied at $250m. “To maximise alpha, you cannot ignore small caps,” he says. Not because he believes that small and medium-sized companies outperform on average, but because they are poorly researched and more diverse.
Companies, not countries
Khemka does not seek “to choose countries that will outperform”, which is “impossible”, but “to identify companies that will beat the market in each country”. Just under a fifth of the portfolio is invested in developed-market companies that derive most of their value from emerging markets and enable governance issues to be overcome.
Assessment of governance starts with a “net democracy score” for each country, provided by the Polity Project, a widely used database for monitoring governments. This scores Taiwan, Poland and India well but China, the Gulf and Saudi Arabia poorly.
“Authoritarian countries have poor property rights,” he says. “How can you expect a government to respect the rights of foreign investors if they don’t respect the rights of small farmers?”
That leads to underweighting China (21% of the portfolio compared with 30% in the allocation is compensated for with holdings in HSBC, LVMH, Naspers and Prosus, which has a large stake in Chinese internet giant Tencent. Exposure to Taiwan is 5% (underweight compared to the benchmark) although tech holdings include key semiconductor-equipment makers ASML and Disco. Khemka is also averse to the energy, mining, utilities and real-estate sectors owing to their exposure to unpredictable and arbitrary government interference. Companies majority-owned by the state have the same problem. Valuation is an “important consideration” in stock selection, although the portfolio has a higher return on equity and higher earnings growth, and is more expensive than the MSCI Emerging Markets index.
Khemka is unapologetic about the 126 names in the portfolio: “Focus is counterproductive in emerging markets.”
The top 15 holdings, led by Samsung and Taiwan Semiconductor, account for 35% of the total. Portfolio turnover is around 30% per annum and the overlap with the MSCI index is about 30%. All these factors, Khemka accepts, could cause the fund to underperform from time to time, but the likelihood is that AWEM will justify those brave enough to buy when most investors are hiding in foxholes.
History and Khemka’s record are very much on investors’ side.
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