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Questor: once a ‘total dog’, this India trust has rebounded – but the 20pc discount remains
Stock markets are supposed to react instantly to new information but in the case of investment trusts it doesn’t always seem to happen. This can, of course, give rise to bargains.
Questor has already tipped a couple of investment trusts whose discounts reflect poor past performance under previous managers rather than prospects under the current team. Today we think we’ve unearthed another.
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India Capital Growth is below the radar of many investors and has had a chequered past. But under a new management team it is well placed to exploit the huge opportunities in the subcontinent, according to Nick Greenwood, in whose Miton Global Opportunities trust India Capital Growth is the largest holding.
“This trust is still seen as a complete dog,” he said. “The first management team lost about half the money, then a new team came in and did the same, leaving the price at about 29p. The new managers have got the value of the assets back up to about 107p, but the lingering poor perception, on top of certain technical factors, leaves the share price at 86.5p.”
Mr Greenwood said the prospects for the Indian economy “just keep getting better”. He said the prime minister, Narendra Modi, was “no Thatcher” but a good administrator whose reforms would directly benefit Indian companies.
For example, Mr Modi is harmonising taxes on sales and services, bringing an end to a system of separate taxes in each state. This may sound technical but Mr Greenwood said the benefits would be significant.
“Currently it takes about three days to drive a truck from Mumbai to Delhi because the driver has to stop at each state border to pay its taxes – and often bribes on top. When nationwide taxes are introduced there will be no need for these stops and the journey time will be reduced to two days.”
To avoid the current administrative burden, many Indian companies that operate across the country maintain warehouses in each of the 29 states, a huge drain on money and efficiency.
The tax harmonisation, along with the recent withdrawal of large denomination banknotes, is expected to encourage more of the Indian economy to move away from informal structures and into the mainstream. This, said Mr Greenwood, was positive for listed companies as they currently lose some business to informal rivals.
Another of India’s advantages is the relatively well established stock market.
“The markets in some emerging nations are much less developed, so a fund manager might spot an opportunity in a certain part of the economy and then be unable to find a listed company that operates in it,” Mr Greenwood said. “Several thousand firms are listed on the Indian market, allowing managers to genuinely stock-pick.”
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The trust is largely focused on medium-sized companies, a sector where valuations are lower in India than in some Western markets, he added.
Mr Greenwood has all his self-invested pension money invested in the Miton trust.
Other fund managers have pointed to further positive developments in India, such as Mr Modi’s recent election victory, which should ensure political stability for seven years, the introduction of high-speed internet and the roll-out of a social security system.
Such a promising background and the performance of the trust under its new management make the current 19.8pc discount seem excessive. The “ongoing” annual charge, 1.98pc, is high but not unreasonable for a specialist fund such as this.
Questor says: buy
Ticker: IGC
Share price at close: 86.5p
Other trust news
Monks investment trust, tipped by Questor in October, is reducing its management fee on May 1. The first £750m of assets will continue to incur a charge of 0.45pc, but the fee will reduce to 0.33pc thereafter. It is estimated that the ongoing charge will fall by 0.04 of a percentage point. The ongoing charge for the year to April 31 2016 was 0.59pc.
Merchants trust has raised its dividend for the 35th consecutive year.
Electra investment trust has decided to return the proceeds of some asset sales by means of a special dividend rather than by the issue of “B” shares. Special dividends are seen as less tax efficient for many private investors and some stockbrokers have criticised the move.