PIN - PIN: Outperform With India's 'Best Of Breed'

2023-12-29 02:37:47 ET

Summary

• India has been the standout equity market performer in emerging Asia.
• Using a quality-focused stock selection approach further adds to the outperformance.
• Heading into an action-packed 2024, Invesco's India ETF is well-positioned.

Global growth is slowing, but India has felt no such drag - quarterly GDP growth is still up in the high-single-digits %, while unemployment is down and inflation is well under control. In addition to a resilient domestic consumption story, a key reason for the outperformance has been a big capex push from the government this year, culminating in a +33% step up in the overall outlay. So even with goods exports suffering from external headwinds, key capital-intensive sectors like infrastructure/construction and industrials have thrived, with the benefits also filtering through to earnings throughout the broader landscape. And structurally, India's export mix continues to benefit from a resilient services component (low-teens % growth to date) - a useful offset to challenges on the goods side.

Given the strong economic and corporate fundamentals, as well as the extensive mid to long-term runway, India's large-cap rally this year seems justified. Yes, flagship indices like the Nifty 50 and MSCI India have re-rated; but relative to historical levels, large-cap valuations are certainly nowhere near overextended. Investors who don't mind paying a bit more for India's 'best of breed' have done even better - the Invesco India ETF (PIN), a yield and quality-focused fund I've been bullish on all year (see prior coverage here ), has consistently outperformed comparable MSCI India trackers over the last decade. Expect this trend to continue over the long-term, as India's 'best of breed' consolidate their moats and sustain superior shareholder value creation. Ahead of a catalyst-rich 2024 (general elections, potential monetary pivot, and a major index inclusion for India's sovereign debt), the setup for PIN is compelling.

Invesco India ETF Overview - Invest in India's Highest-Quality Large-Caps

The Invesco India ETF is unique in that it filters its portfolio holdings based on yield and quality criteria, achieved by tracking the market cap-weighted FTSE India Quality and Yield Select Index. The screen starts by excluding the bottom 10% dividend yielders (on a trailing twelve-month basis) and then eliminating another 10% based on profitability and leverage levels. This differs from WisdomTree India Earnings Fund (EPI) offering, which emphasizes profitability more heavily in its selection process. Either way, quality pays off in India, with both funds ranking at the top of Morningstar's India equity list.

While PIN has continued to see its managed assets expand to ~198m, the fund's expense ratio remains very reasonable at ~0.8% - a slight discount to key comparable EPI's 0.85% and only slightly above the ~0.6% charged by iShares MSCI India ETF (INDA). That said, liquidity is more of an issue for PIN, resulting in a wider median bid/ask spread of 0.2% over 0.03% and 0.02% for EPI and INDA, respectively.

The overall PIN portfolio composition hasn't shifted too much since I last covered the fund. By sector, Financials is still the largest allocation at a slightly higher 18.3%, followed by Information Technology (largely unchanged at 14.4%) and Consumer Discretionary (slightly down at 12.1%). Other sector allocations over the 10% threshold include Energy (11.8%) and Materials (10.8%).

The single-stock composition is also largely intact, along with its portfolio skew toward large-cap growth (50.8%) over value (5.5%). Indian conglomerate Reliance Industries (RLNIY) remains the largest holding, albeit at a slightly reduced 8.7%, followed by HDFC Bank (HDB) at an increased 8.0% after a steep Q4 rally. IT services corporations Infosys (INFY) and Tata Consultancy Services (TTNQY) also feature prominently at 5.5% and 3.9%, respectively. At a trailing P/E of 24x, PIN's portfolio doesn't screen cheaply on an absolute basis. Roll earnings one year forward, though, and the multiple drops to ~20x - not unreasonable given Indian large-caps are on track for +24% earnings growth this year and a further low-teens % pace through 2024/2025.

Invesco India ETF Performance - Outpacing the Broader Indian Large-Cap Universe

PIN has rallied all year, and while the uptrend slowed in Q3, another surge in Q4 has kept the YTD total return well ahead of the rest of Asia at +14.2% (as of end-November). While the fund has lagged its key comparable EPI's +17.1% return over the same time period, PIN has still outpaced broad-based MSCI India and Nifty 50 trackers. Over a longer ten-year timeline as well, PIN's +9.1% annualized NAV return has outperformed the broader Indian market.

The key negative to investing in Indian ETFs is the wide tracking errors most funds suffer relative to their underlying benchmarks. PIN isn't immune from this - this year, the fund has lagged its benchmark FTSE India Quality and Yield Select Index by over three percentage points. Even after adjusting for the expense ratio, that's a sizeable hit to investor returns. Relative to EPI, though, PIN actually has a one percentage point edge on a YTD basis - a testament to the manager's success in navigating the higher expenses (capital gains, FX, transaction costs, etc) and rebalancing needs associated with running an Indian factor ETF. One way investors can minimize the tracking error is via broad-based ETFs like INDA, though these also lack the factor approach (quality in the case of PIN) that has been proven to outperform in India.

Outperform with India's 'Best of Breed'

Alongside the rest of the Indian market, PIN has been on a tear this year. Some of the upside has come via re-rated valuations, but earnings growth has kept pace as well - consensus estimates currently peg large-cap earnings growth to hit +24% in 2023 before sustaining a low-teens % pace through 2024/2025. Thus, on a relative basis, PIN's ~20x forward earnings multiple isn't all that pricey - particularly when you also consider the portfolio's ability to sustain peer-leading ~20% returns on equity. Net-net, I continue to like PIN as a play on higher-quality Indian names heading into a catalyst-rich 2024.

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