IFN - IFN: A Quality Play On The Indian Growth Story

2023-05-08 12:42:21 ET

Summary

• The quality-focused abrdn India Fund portfolio has consistently outperformed through the cycles.
• Like Indian equities, IFN trades at a premium to the emerging market universe but also offers higher growth and best-in-class ROEs.
• Alongside the fund's NAV discount, the current favorable setup for Indian equities offers investors a compelling entry point.

Indian equities have staged a comeback over the last month, having been out of the spotlight post-China reopening. With the long-term investment case firmly intact for India, fund flows are beginning to reverse as another resilient earnings season emphasized the highly profitable companies within the Indian market. The macro story also remains as compelling as ever – like China, India is one of the few major economies on track for a growth premium this year, with domestic demand strength set to offset any external weakness near-term. There is plenty for long-term investors as well - the supply-side measures outlined by the government to reinvigorate capex, as well as India's demographic tailwinds, bode well for the growth runway. As always, Indian equities trade at a premium, though the superior ROEs and narrowed relative valuation gap post-underperformance in March/April present opportunities. For investors who favor quality, the abrdn managed India Fund ( IFN ) is worth a look, given its portfolio of best-in-class Indian franchises with good earnings outlooks. IFN's competitive expense ratio and strong track record vs. its benchmark are also key strengths, and at the current NAV discount, IFN is a worthy portfolio addition.

Fund Overview – A Competitively Priced, Quality-Focused Indian Fund

The US-listed abrdn India Fund, actively managed by the abrdn Asia Equity Team, seeks to outperform the MSCI India Index (net of dividends), a 114-constituent index tracking the large and mid-cap segments of the Indian equity market. Like the rest of the abrdn group, the fund allocates capital based on a fundamental bottom-up stock selection approach. The closed-end fund held $463.1m of net assets at the time of writing and charged a 1.4% gross expense ratio. Per the latest factsheet , ~1.1%pts of annual expenses went to management fees, with the remainder allocated to other expenses such as fund administration, legal, and investor relations, among others. Even relative to the ~0.9% charged by leading passive Indian funds like the iShares India 50 ETF ( INDY ), IFN is competitive. That said, the active share of >50 indicates the fund isn't too far off from being a closet indexer. A summary of key facts about IFN is listed in the graphic below:

As reflected in the chart below, the fund's sector allocation is heavily concentrated on three sectors, with Financials topping the list at 29.2%, followed by Information Technology at 12.7% and Consumer Staples at 12.7%. IFN has no other sector holding >10%, though there are five other sectors with a >5% allocation. These include Consumer Discretionary (6.9%), Materials (6.8%), Health Care (6.5%), Communication Services (6.3%), and Industrials (6.1%). On a cumulative basis, the top six sectors accounted for a combined 68.3% of the total portfolio.

Per the fund's March factsheet, IFN's single-stock exposure is relatively concentrated as well, albeit in India's highest-quality franchises. The largest single-stock exposure is multinational bank and financial services company ICICI Bank ( IBN ) at 9.1%, followed by IT services leader Infosys ( INFY ) at 7.8%, and development finance institution HDFC at 7.2%. Other notable holdings include Indian consumer goods leader Hindustan Unilever at 7.0% and another IT services leader, Tata Consultancy Services ( OTCPK:TTNQY ), at 5.1%. All in all, the top ten holdings accounted for 56.1% of the overall portfolio, with 1.6% in cash.

Fund Performance - Solid Capital Appreciation Track Record in a Market That Rewards Quality

As of Q1 2023, the fund was up by 5.1% in market price terms, though this was mainly due to a narrowing NAV discount. Still, IFN was only down 1.5% in NAV terms, outpacing its benchmark MSCI India Index, which returned -6.4% over the same period. The fund has excelled over long timelines – in market price terms, the fund has compounded at 8.5% over the last decade vs. the MSCI India Index at +7.0%. Also worth noting is that since its inception in 1994, the fund has compounded at an impressive +8.4% in NAV terms and +8.1% in market price terms.

In contrast to the standout capital appreciation record, the fund's distribution isn't as impressive. While the $3.18/share distribution last year equates to a ~20% yield, most of this was down to the realization of prior capital gains. The recurring income portion of $0.42/share last year implies a solid ~3% yield, but the income distribution tends to be inconsistent (no income yield in 2020/2021, for instance) and isn't something income investors can count on. This year has, however, seen the fund's NAV discount close significantly to the low-single-digits percentage range (vs. ~10% average last year), likely helped by the YTD outperformance. The buyback authorization (up to 10% of its outstanding shares) offers additional support, though investor sentiment and fund performance will remain key to the NAV/market price delta.

India's Domestic Growth Offsets External Uncertainties

With the EU/US undergoing an extended monetary tightening cycle, external risks are understandably top of mind, given India's trade exposure. Yet, the domestic demand strength should not be underestimated – not only is credit growth up in the mid-teens percentage, but PMIs are also in expansionary territory (i.e., >50). Coming off a positive budget and strong real GST collection numbers, the fiscal push will be another key theme this year as supply-side-focused policy measures filter through to the broader economy. Given India's sustained growth premium and tendency to translate nominal GDP growth to corporate earnings, there remains ample room for upward revisions in the coming quarters.

There's plenty here for long-term investors as well, particularly on consumption, with India's 'demographic dividend' set to kick in. As more of its young population benefits from the country's urbanization and moves into the middle class, IFN's portfolio of best-in-class franchises is particularly well-positioned to benefit from the 'premiumization' trend. Net, the setup for India is compelling, and with ample growth drivers in the pipeline (e.g., energy transition and digital infrastructure buildout), the country is well-placed for above-par economic growth in the years to come. The valuation isn't cheap at first glance (the MSCI India Index trades at ~23x PE vs. IFN at ~26x), but earnings growth expectations remain among the highest across emerging markets. Alongside India's premium ROEs and favorable commodity backdrop, it is as good a time as any to start adding exposure to quality Indian companies via IFN.

A Quality Play on the Indian Growth Story

Indian equities have been a laggard YTD, largely due to investor flows rotating into other high-growth Asian markets. But with the near and long-term Indian investment case still compelling, there remains ample reason for optimism on IFN. For one, the fund's quality-focused stock selection track record has outperformed the broader market and should continue to pay off heading into a challenging external backdrop. With domestic demand indicators also resilient and Indian companies continuing to sustain above-par ROEs, the premium (albeit narrowed YTD) relative valuation seems warranted. Expect more P&L outperformance ahead as the government's expansionary supply-side policies (mainly via a ramped-up capex cycle) filter through to earnings. Alongside its competitive expense ratio, high-quality portfolio, and NAV discount, IFN is a worthy choice for investors looking to capitalize on the Indian growth story.

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