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India Capital Growth fund targets mid-cap gems for outperformance

India Capital Growth fund targets mid-cap gems for outperformance

India is one of the Armchair Trader’s tips for 2024, and we believe the world’s largest democracy, and fifth biggest economy in the world is set to boom this year. However, for UK retail investors looking to get into India without the research infrastructure required to invest in individual stocks, there are essentially two options: choose an actively managed fund or buy an index-tracker.

One such actively managed fund is the India Capital Growth Fund [LON:IGC] manged by Ocean Dial Asset Management. The India Capital Growth Fund is a closed-ended, Guernsey-based limited company, listed on the premium segment of the LSE. The investment trust aims to provide long-term capital appreciation by identifying long-term investment opportunities in mid- and small-cap Indian companies.

According to the Investment Association, the trade body that represents investment managers and investment management firms in the UK, there is around GBP4bn in assets under management in UK retail funds focused on India and the Indian subcontinent, double those in China-focused funds.

India is no secret, and investors have been beating a path to its gates for some time, convinced by the demographics, the domestic demand, and the growth pathway, with many analysts predicting that India will break into the world’s top three economies by the end of the decade with a GDP of around USD7.3 trillion.

India will be the second largest economy by 2075

Extrapolating the growth curve further, Goldman Sachs reckons that India will be the second economy in the world by 2075.  Most of these predictions are based on its 1.4 billion population, making it the world’s second most populous nation with 17% of the world’s population. This population is young, aspirational with rising disposable income, a healthy birthrate, increasing urbanisation and a growing middle class.

If India just sold the products it makes to its own population, it would still grow in economic and political importance, but India is becoming a global economic player in heavy, traditional industry as well as the technology sector and services industry with world-class telecoms, pharmaceutical, IT and increasingly automotive industries. And it is in future industries where India is set to shine.

Buoyed by the success of the Chandrayaan-3 lunar mission at the end of the year (landing a vehicle on the surface of the moon, a task that the might of NASA spectacularly failed to do this week), as well as technology India is also becoming a leader in the new green economy, with the World Economic Forum predicting that India will create 50 million new jobs – or USD15 trillion of economic opportunities – in the coming decades.

India is still an emerging market

It is all Chalo! India. However, risks remain. India – despite being the world’s largest democracy – is still beset by political and ethnic tensions, and resides in a volatile neighbourhood, sharing a border with China, one of its economic competitors, and Pakistan, where no love is lost between these nuclear powers.

The country’s infrastructure is not keeping pace with its population and many projects are bottlenecked, inhibiting growth. Although India does have a rapidly growing population, that are progressively getting wealthier, there is vast income inequality. According to the United Nations in 2019, 6.7% of India’s population, or 80 million people, lived below the poverty line of USD1.25 a day and 84% of Indians lived on less than USD6.85 per day. There is also a massive skills defecit, with much of its population unable to participate in a global, knowledge-based economy.

The other issue with investing in India is the cost. India is expensive, with an average price/earnings ratio above even blue-chip US stocks. The Nifty50, the benchmark Indian stock market index that represents the weighted average of 50 of the largest Indian companies listed on the National Stock Exchange is the most expensive of Asian indices and in the last quarter of 2023, many global investors started dumping the index as it was deemed too hot. However, those same investors tucked away a tidy profit having put on 19.4% over the year and has arguably been the best-performing equity market over ten and 20-years after the S&P500. The Nifty Midcap 100 Index did even better.

Which is why the Ocean Dial team, led by Gaurav Narain, fund adviser and co-head of equities India has focussed on the midcap in the India Capital Growth Fund. Narain joined Ocean Dial in November 2011, having been an investor in the Indian equity markets for the previous 18-years. He has held senior positions as both a fund manager and an equities analyst in New Horizon Investments, ING Investment Management India and SG (Asia) Securities India. Narain is supported by Shahil Shah, assistant fund manager who has been at Ocean Dial since 2005 and Saurabh Chugh, analyst who joined the boutique a year later.

The fund has an investment universe of 140 stocks, and at the close of last year held 39 positions. The fund, which according to Hargreaves Lansdown has a market cap of GBP170m follows a bottom-up, high conviction strategy, identifying a mix of opportunities that can deliver excess returns across market cycles to allow for repeatable outperformance. The stock-picks must also be scalable to ensure the construction of a diversified portfolio. The company looks at the long-term picture, and has a low portfolio turnover of 10% to 12%-a-year with more than 65% of its stocks held for more than five-years.

Outperforming its benchmark over 12 months

Given the size of the market, the small-cap picks that the India Capital Growth Fund invests in are not tiny mom ‘n’ pop stores, as Ocean Dial defines small-cap as less than USD1bn and mid-cap stocks as companies with a market cap of between USD1bn and USD7bn with a median market cap per stock of USD1.9bn.

The fund celebrated its coming-of-age 18th anniversary last month and Ocean Dial has been at the helm as investment adviser since December 2011. Benchmarked against the S&P Bombay Stock Exchange MidCap Total Return index, to the end of November the fund was over one-month, three-months and six-months marginally behind its benchmark returning 3.1%, 6% and 21.6% respectively.


Over one-year the fund was 60 basis points ahead of the benchmark, returning 23.9% and had a NAV return of 83.8% over three-years and 79.3% over five-years.

Narain said in a recent interview with Wealth Briefing: “For us, the largest component of our portfolio is in our consumer-facing companies, playing on the Indian demographics story. The second largest is in financials, which is a play on the growth in the overall economy and investment cycle.”

Last March, AssetCo, the asset manager founded and chaired by Martin Gilbert who was co-founder and CEO of Aberdeen Asset Management until 2017, acquired Ocean Dial Asset Management for GBP4.1m and merged it with River & Mercantile. Ocean Dial now shares infrastructure with AssetCo’s group, strengthening the breadth and depth of resources available to Narain and his team, which includes access to River & Mercantile’s distribution and investment support capabilities.

India Capital Growth Fund top five holdings:

Company Weighting Sector
Federal Bank [NSEI:FEDERALBNK] 5.70% Financial Services
IDFC Bank [NSEI: IDFCFIRSTB] 4.70% Financial Services
Indusind Bank [NSEI:INDUSINDBK] 4.70% Financial Services
Neuland Laboratories [NSEI:NEULANDLAB] 4.50% Pharmaceuticals
Ramkrishna Forgings [NSEI:RMKF] 4.30% Industrials

Source: India Capital Growth Fund 30-Nov-23

India is at an early stage of its development – the foothills of the Himalayas – compared to where it’s heading and as it gains momentum and critical mass it will become the unstoppable investment destination of the next half-century. Now is a good time to jump aboard the rail carriage and access to the economy through a fund like the India Capital Growth Fund is a great stepping-off point.

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