Seeking opportunities within the world’s fastest-growing major economy

• Active management in markets like India provides the flexibility to navigate challenges and uncover growth opportunities that may be missed by the broader market.

• The RAMS Investment Unit Trust - India Equities Portfolio II A USD uses an approach known as GARP (Growth at Reasonable Price), targeting companies with strong growth potential that aren't excessively overvalued.

• The portfolio manager uses a multi-cap strategy, investing in both large caps for stability and mid and small caps for higher growth potential.

• The two heaviest sector allocations are to financials and consumer discretionary, both linked to the rising per capita income and spending power of the Indian population.

• The fund has outperformed while experiencing comparable drawdowns relative to benchmark and peers, which is a testament to its security selection.

India’s GDP rose by an impressive 8.2% year-on-year in the fiscal year ended March, cementing its status as the world’s fastest-growing major economy. A robust domestic economy and optimism that Modi’s policy direction will continue in his third term as prime minister have driven a rally in the equity market. Just take a peek at indices such as the Sensex Index and the MSCI India Index which have consistently reached record highs this year (Figure 1).

Figure 1: Indian equities hit record highs

The opportunities and challenges of investing in India

There is no doubt that India presents a compelling structural growth story. Despite already being the world's most populous country, India's population is projected to continue rising and reach its peak in the early 2060s as per UN estimates. This demographic dividend promises a significant labour force and heightened consumer demand. At the same time, the strength of the middle class is expanding, bolstering purchasing power and driving consumption.

India is also seeing growth in technology and innovation. Foreign chipmakers have committed substantial investments into the country’s tech sector. A noteworthy example is Micron, backed in part by the Indian government, which is constructing a new assembly and test facility to produce the first locally manufactured semiconductor chip by the end of 2024.

However, amidst India’s promising opportunities, structural challenges loom large. Youth unemployment is alarmingly high, with the Centre for Monitoring Indian Economy (CMIE) reporting a 44.5% jobless rate for those aged 20 to 24 in the October-December quarter of 2023. Poor schooling and high drop-out rates hinder young people from acquiring the skills and jobs needed to help sustain India’s high growth and technological advancements.

Additionally, India grapples with a daunting twin deficit that threatens long-term economic stability. During the June elections, Modi’s party lost its decade-old majority. Moody's warns that Prime Minister Modi's smaller mandate raises the risk of increased populist spending, potentially leading to an expanding fiscal deficit. Meanwhile, we note that India’s persistent current account deficit continues to exert downward pressure on the rupee, amplifying economic challenges.

But despite the negatives, valuations of Indian equities remain lofty, and we believe it presents the risk of a market correction should future economic and earnings growth fall short of expectations.

In our view, investors considering investments in India should be selective. Active management offers greater flexibility to navigate challenging environments and can identify pockets of growth and value opportunities that may be overlooked by the broader market.

(Related article: Indian equities after election results: Are they a bargain now?)

RAMS India Equities Portfolio Fund II: Growth at Reasonable Price

We highlight the RAMS Investment Unit Trust - India Equities Portfolio II A USD which is managed by Mr. Sulabh Jhajharia, a portfolio manager from Nippon Life India Asset Management Limited (Singapore), one of India’s leading asset management companies, formerly known as Reliance Nippon Life Asset Management Limited.

Launched on 16 June 2017, the USD Class A share class of the fund builds on a strategy that has been in place since 2016. The fund manager uses an approach known as GARP (Growth at Reasonable Price), targeting companies with strong growth potential that aren't excessively overvalued.

A portfolio of 40-60 stocks is constructed from a vast universe of over 5,000 companies through a combination of top-down and bottom-up analysis. Key stock-picking criteria include growth and profitability, balance sheet strength, competitive advantage, and valuations. On a macro level, the portfolio manager considers factors like domestic and global growth, inflation and interest rates, as well as current account and fiscal deficit.

As of 30 June 2024, the top 10 holdings make up nearly 40% of the portfolio, comprising a diverse mix of companies across various sectors (Table 1). These include multinational conglomerate Reliance Industries, private sector banks like ICICI Bank, HDFC Bank and Axis Bank, alongside the global IT services leader Infosys.

We also observe that the fund holds mid-cap names like Zomato, an Indian multinational aggregator and food delivery company. This is because the portfolio manager employs a multi-cap strategy where large caps provide some stability, while mid and small-caps (SMID caps) offer higher growth potential and may become future leaders. On average, the portfolio maintains a 70/30 split between large caps and SMID caps. In contrast, the fund’s benchmark, MSCI India Index, primarily consists of large-cap stocks with SMID caps typically representing less than 5%.

Table 1: Top 10 holdings

Name	Sector	Weight
Reliance Industries	Energy	6.92%
ICICI Bank	Financials	6.16%
Infosys	Info Tech	4.50%
HDFC Bank	Financials	4.21%
Axis Bank	Financials	3.34%
Larsen & Toubro	Industrials	3.05%
Zomato	Consumer Discretionary	3.02%
Varun Beverages	Consumer Staples	3.00%
NTPC	Utilities	2.96%
Bharat Electronics	Industrials	2.60%
Total	-	39.76%
Source: Nippon Life India Asset Management (Singapore), iFAST Compilations Data as of 30 June 2024

Riding on India’s rising purchasing power

On a sectoral level, the two heaviest allocations are to financials and consumer discretionary, both slightly overweight compared to the benchmark (Figure 2). These sectors are favoured as they are linked to the rising per capita income and spending power of the Indian population.

For instance, rising income typically leads to stronger loan growth and fee income from wealth management for banks. In the quarter ended 31 March 2024, Indian banks saw robust growth in earnings. The largest private sector lender HDFC Bank reported 37.1% year-on-year increase in net profits, with non-interest income more than doubling. ICICI Bank, India's second-largest private lender, also reported a 17.4% year-on-year increase in net profit, supported by robust loan growth.

Conversely, the fund’s biggest underweights are in the energy and materials sectors, though by only 2-3%. The shift towards energy transition is seen as a compelling long-term strategic theme, particularly benefiting electric vehicles (EVs) and renewable energy producers.

Figure 2: Financials and consumer discretionary are the largest sectors

One of the best-performing India equity funds on our platform

Across the one, three, and five-year periods, the RAMS Investment Unit Trust - India Equities Portfolio II A USD has consistently outperformed its benchmark and other Indian equity funds on our platform (Figure 3). Looking deeper, this strong performance was due to the fund’s impressive returns across most calendar years.

Figure 3: The fund has delivered stellar performance

In 2021, the fund delivered exceptional performance. It posted robust returns of 42%, far outpacing its benchmark and peers (Figure 4; all returns in SGD terms, unless otherwise stated). This surge coincided with India's robust stock market recovery from the Covid-19 pandemic and a shift in foreign investor interest from China to India. SMID stocks notably outperformed their large-cap counterparts.

2023 was also a great year for the fund, driven largely by its holdings in SMID caps. On a security level, key contributors include Supreme Industries, a leading player in India's plastics processing sector, CreditAccess Grameen, a prominent microfinance institution, and Tejas Networks, which specialises in telecommunications and networking solutions. To date, the fund has continued to hold on to most of these names due to a strong growth trajectory.

Figure 4: Outperformance in most calendar years

Another point worth highlighting is that the fund does not own shares of Adani Group’s companies, representing underweight positions compared to its benchmark. This decision turned out well for the fund as Adani Group stocks suffered great losses in early 2023. The losses came after Hindenburg Research, a US-based short-seller, accused the Adani Group of stock manipulation, accounting fraud, and the misuse of tax havens.

Despite the fund’s higher allocation to SMID caps, its five-year maximum drawdown (-38%) remains on par with benchmark (-38%) and peers (-37%). This suggests an effective risk management. Overall, we believe the fund’s outperformance and comparable drawdowns are a testament to its investment strategy and security selection.

Final thoughts

In a nutshell, amidst record highs for Indian equities, active management is key to identifying pockets of opportunity. The RAMS Investment Unit Trust - India Equities Portfolio II A USD  stands out with its solid performance track record. It focuses on companies with strong growth potential that are not excessively overvalued. Moreover, the fund’s multi-cap strategy effectively captures the higher growth potential of SMID caps which are typically underrepresented in benchmarks like the MSCI India Index. With significant allocations in sectors like financials and consumer discretionary, the fund positions investors to benefit from India’s robust secular growth trends.