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Stewart Investors Indian Subcontinent Sustainability: May 2021 fund update

Investments can go down as well as up so there is always a danger that you could get back less than you invest. Nothing here is personalised advice, if unsure you should seek advice.
  • Sashi Reddy and David Gait are highly experienced fund managers in Indian and Asian companies
  • Their track record is impressive, and they've delivered strong returns ahead of the benchmark over the long run
  • We like the focus on stewardship, sustainability and high-quality companies
  • This fund is on the Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How this fund fits in a portfolio

The Stewart Investors Indian Subcontinent Sustainability fund focuses on companies based in the Indian Subcontinent, with the aim to provide long-term investment growth. The fund mainly invests in Indian companies, though it can also invest in Pakistan, Sri Lanka and Bangladesh. We think the fund could sit well alongside those that invest across the globe or more broadly across Asia. India has excellent long-term growth potential, but a fund focused on a single emerging country is a high-risk option so it should only be considered as a small portion of an investment portfolio.

Manager

Sashi Reddy has managed this fund since December 2009. He joined First Sentier Investments in 2007, initially providing analysis and research support to portfolio managers, with a focus on Indian companies. India has remained his specialist area since, though he also looks at companies across the globe.

David Gait has been co-manager of the fund since the end of 2007. He is a long-standing member of the group's Asian equities team, which he joined in 1997, and has been fundamental in helping to evolve the Asian investment strategies.

Reddy is a highly experienced and respected fund manager in Indian equities, and we like the fact he has the support of other managers we hold in high regard and a close-knit team of analysts. Some of these team members manage other funds with their own good track records.

Reddy also currently runs the Stewart Investors Worldwide Leaders Sustainability Fund, though we feel this is a reasonable workload. He gave up some of his previous fund management responsibilities to focus fully on the Indian and global funds. He also has the help and input of other managers and analysts, and the team focuses only on a selection of companies that meet their quality threshold.

Process

The team at Stewart Investors has based its investment approach on the same philosophy that dates to 1988. The philosophy is founded on stewardship, and fund managers invest investors' capital as though it's their own. They aim to grow investors' wealth over the long term, while limiting losses when markets fall.

Reddy and Gait invest in quality companies they believe can deliver sustainable and predictable growth over the long term. They like cash-generative businesses, which are in good financial health and could withstand periods of economic volatility. The managers also put emphasis on businesses’ people and culture, and only invest in companies they believe are run by management teams with integrity.

The managers mainly invest in large and medium-sized companies, though they also invest in some higher-risk smaller companies. They’ve recently increased exposure to small and medium-sized businesses, finding more opportunities over the past couple of years. Our analysis shows the managers have added value by investing in this part of the market over the longer term. They carry out in depth analysis over a period of time to ensure only the highest-quality companies make it into the fund, as they’re aware of the extra risk involved from these less proven businesses.

87.4% of the fund is currently invested directly in India. The rest is invested in Bangladesh and Sri Lanka, with around 7% in cash. The managers hold higher levels of cash at times, which can provide a buffer in tougher market conditions and the chance to invest in favoured companies at cheaper share prices during times of stress. 2020, during the coronavirus crisis, was an example of this.

IndiaMART was added to the fund last year. It provides a way for buyers and suppliers to connect and buy and sell each other’s products. It currently has over 2m businesses on its platform. It’s a smaller business than some others in the fund so, to mitigate some of the risk, the managers started with a small investment, which they’ve added to as they’ve gained confidence in the business and its people.

The managers focus on companies and sectors that are typically more defensive, which means they're expected to hold up a bit better when markets are weaker. This includes the consumer staples and healthcare sectors, which sell products and services that people often continue to buy, regardless of what's going on in the wider economy.

Culture

Stewardship and sustainability form a core part of the team’s investment strategy, and it's become an increasingly important part of the process over the years. Reddy and Gait focus on companies they believe could benefit from and contribute to the sustainable development of the countries they're based in. Analysing environmental, social and governance information helps them understand more about the quality of companies, and they think their long-term investment horizon makes sustainability even more important.

We think the culture and philosophy that has evolved at the group over the years is attractive. The team doesn't put personal gain ahead of its investors and looks for companies that treat their customers in a similar way.

Stewart Investors forms part of First Sentier Investments, which was acquired by Mitsubishi UFJ, a Japanese bank, in 2019. Takeovers can sometimes lead to disruption and corporate change, and there has since been some change within the team, though positively Stewart Investors remains an independent investment team. We have a positive view of the team but will continue to look out for potential further change.

Cost

This fund has an ongoing annual fund charge of 1.11% which, although high, we think is reasonable given the quality of the fund managers, and the fact it invests in a single emerging country where costs can be higher. Investing through HL, a platform fee of up to 0.45% a year also applies.

Performance

The managers' long-term record on this fund is impressive. It's outperformed the broader Indian stock market since Gait became co-manager in 2007 and since Reddy has been lead manager from 2009. Our analysis shows Reddy and Gait have added value through good stock-picking, which means many of the companies they invest in go on to perform well regardless of the size of the company or what sector it's in. Investments in medium-sized companies have added the most value. As always, past performance isn't a guide to future returns.

The focus on quality companies and a more conservative investment style means the fund has tended to hold up better when the Indian stock market falls but doesn't quite keep up when it rises. This has led to an attractive performance profile over the long run.

Over the past year, our research shows some of the fund’s medium-sized companies have been the strongest performers, and investments in the industrials, basic materials and consumer discretionary sectors have been particularly helpful. Engineering company Tube Investments of India Limited and multinational automotive manufacturer Mahindra & Mahindra were two of the top performers over this time.

We recently spoke with Reddy and he’s mindful of the recent increase in Covid-19 cases in India, and the devasting death toll. From an investment perspective, in the short term he thinks it could have the greatest negative impact on areas such as banks, automotives and manufacturing. But he doesn’t think the economic impact will be as bad as when the pandemic hit last year, particularly as more people work remotely now. Reddy focuses on businesses with good governance and corporate practices, including those that take care of their workers, and those that could prove resilient in more turbulent times.

We're positive about the fund's long-term prospects, but investors shouldn't underestimate the potential for volatility, especially as the fund mainly focuses on a single emerging country. All investments can fall as well as rise in value so you could get back less than you invest.

Annual percentage growth
Apr 16 -
Apr 17
Apr 17 -
Apr 18
Apr 18 -
Apr 19
Apr 19 -
Apr 20
Apr 20 -
Apr 21
Stewart Investors Indian Subcontinent Sustainability 33.0% 10.5% 1.3% -14.2% 45.7%
FTSE India 41.2% 5.7% 6.5% -17.9% 41.2%

Past performance is not a guide to the future. Source: Lipper IM to 30/04/2021.

More on Stewart Investors Indian Subcontinent Sustainability, including charges

Stewart Investors Indian Subcontinent Sustainability Key Investor Information

Important information - Please remember the value of investments, and any income from them, can fall as well as rise so you could get back less than you invest. This article is provided to help you make your own investment decisions, it is not advice. If you are unsure of the suitability of an investment for your circumstances please seek advice. No news or research item is a personal recommendation to deal.


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