India Capital Growth Fund leads the way in the sub-continent

You may have seen the pictures on the weekend news of Theresa May jetting off to India to smooth the way for the negotiation of the UK’s first post-Brexit trade deal. Ahead of her trip she described her destination as a leading power in the world.

One of the best ways to benefit from the upside potential is to invest in the India Capital Growth fund, a £92m investment trust that trades under the ticker IGC. This has a much greater focus on small and mid-cap stocks than its peer group.

It’s a lot easier for investors to benefit from India’s growing economy than it is for British businesses, as there are several well-established investment trusts that provide exposure to the domestic stock market. These are significantly more risky than a regional emerging markets fund, but offer considerable additional upside potential.

The election of Narendra Modi as Prime Minister in 2014 heralded the appointment of a more market friendly government that was committed to removing inefficiencies and attracting foreign capital. India has a more developed equity culture than some of the other emerging markets and has benefited from the low oil price as it has to import most of its energy requirements.

Local share prices surged in 2014 following the election result with MSCI India rising 26.4% in the calendar year. It then fell around 2% in 2015 and has lagged behind the wider emerging markets recovery in the year to date. Traditional valuation measures like the dividend yield and PE ratio make it look more expensive than the broader MSCI Emerging Markets universe, but the country is better placed than many of the other member states.

Domestically focused portfolio

IGC was launched in December 2005, but had a difficult start and is now on to its third team of investment managers. The firm behind it, Ocean Dial Asset Management, specialise in India, yet it was not until the appointment of Gaurav Narain in December 2011 that things started to pick up.

Narain is based in Mumbai and is responsible for the day-to-day portfolio management. From the point he took over to the end of September 2016 the fund’s NAV rose by 134%. This was well ahead of the 81% return from MSCI India and considerably better than the performance of its two main listed peers, JPMorgan Indian (LON:JII) and the New India Investment Trust (LON:NII).

According to a recent research note from the investment trust team at Winterflood, at the end of September there were 39 holdings with the top 20 making up 63% of the portfolio. Only 12% of the fund was invested in large cap stocks – defined as those with a market cap of more than $7bn – with the median market value being £1.1bn.

The fund manager uses a bottom-up approach to stock picking and pays particular regard to cash flow, the return on capital, pricing power and the management team. He also makes sure that the businesses derive the majority of their earnings from the domestic market, which partly explains the large weightings in retail banks and consumer sectors.

Positive outlook

Narain is optimistic about the outlook as he thinks that government reforms including the increased public access to bank accounts and opening up the country to foreign investment will help the economy. The main risks are more global in nature such as an increase in the oil price or an event that triggers a large withdrawal of capital from the emerging markets. 


One of the advantages of investing in India is that the government has more scope to use conventional monetary policy to deal with any crises than the more-developed economies in the West that have become accustomed to ultra-low interest rates.

In October the Reserve Bank of India cut its interest rate by 0.25% to 6.25%. It explained the move by saying that monetary policy remains accommodative and that the cut would help to bring inflation back to its 4% target in the medium term while supporting economic growth.

The poor performance of the fund in its early years has left the shares of India Capital Growth trading on a wide discount to net asset value (NAV) of almost 20%, which seems pretty high given the recent returns. It also looks out of place when you compare it to its main competitors.

JPMorgan Indian is much larger with a market value of £717m and trades on a discount to NAV of 13%. Like IGC it favours the Financial and Consumer sectors, but is cheaper with ongoing charges of 1.24% versus 1.99%. Over the last three years the share price is up 93%.

The New India investment trust has a market value of £238m. It has returned 81% in the last three years and the shares currently trade on a 13.5% discount to NAV. Financials are the largest sector as they are with the other two funds, but they have a lower weighting at 20.6% of the portfolio.

Over the last three years the shares of the India Capital Growth fund are up 133%, which is well ahead of the less domestically focused alternatives and yet it trades on a wider 20% discount. Investing in a single country fund like this is always going to involve a high degree of risk, but if you keep it to a relatively small part of your portfolio you could be well rewarded for taking a long-term position.