First State Indian Subcontinent Fund research update

Kate Marshall | Mon 16 March 2015

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In 2013, sentiment towards India was unsettled by concerns over a weakening currency and the country's twin deficits (a deficit in both its national budget and in foreign trade). These concerns were replaced with high expectations in 2014 following the election of new Prime Minister, Narendra Modi. The ensuing euphoria has since led to strong performance from India's stock markets, particularly in many of the nation's more economically-sensitive industries.

The First State Indian Subcontinent Fund, managed by Sashi Reddy and David Gait, has performed exceptionally well over the period, despite tending to avoid sectors more sensitive to fluctuations in the economic cycle. Instead, the managers favour higher-quality businesses with more defensive characteristics - in particular, they focus on well-run companies with strong cash flows, low debt levels and growing dividend yields. A number of companies - including Marico and Dabur, both producers of consumer goods – have contributed substantially to returns over the past year. The fund operates a concentrated portfolio (45 holdings) which enables each holding to make a significant impact on returns but is a higher-risk strategy.

Following a strong year for the market, Sashi Reddy and David Gait believe the valuations of some of their favoured companies and sectors are beginning to look less attractive. As such they have taken profits from some of the fund's strongest performers and the fund currently holds a relatively high level of cash of almost 8.5%. They would prefer to be patient and increase or initiate new positions in high-quality companies once they become more reasonably valued.

The managers have, however, still managed to find some areas of value. Towards the end of last year they initiated a position in Jyothy Labs, a household and personal care consumer goods manufacturer. The company is currently undergoing transformation from a family-run organisation to a more professional one. Sashi Reddy and David Gait believe company management will successfully complete this transition under the guidance of a CEO with a strong track record of turning around businesses. They also expect the business to challenge bigger multi-national companies by offering better-valued products and more product differentiation to consumers.

Our view on this fund

The team at First State have one of the strongest track records in managing Indian equities. Since launch of the fund in November 2006 the fund has grown by 260.9%* compared with 102.2% for the MSCI India Index, though please remember past performance is not a guide to future returns. The fund's conservative approach also means it has tended to be considerably less volatile than other funds investing primarily in India, while it has also provided more resilience in a falling market. However, it remains a higher risk sector so a long term investment horizon is essential.

Past performance is not a guide to future returns. Source: Lipper IM* to 02/03/2015

The fund was removed from the Wealth 150 list of our favourite funds across the major sectors at the beginning of 2012 as First State felt the fund had reached an optimum size. They are therefore no longer seeking new investment. That said, the fund is managed by a team we hold in high regard and we maintain our positive stance on the fund.