Indian Subcontinent All Cap

Over the quarter, we initiated a new position in Bajaj Auto (India: Consumer Discretionary), a leading manufacturer of automobiles. This is another company in the Bajaj stable that we believe represents a strong franchise with a high-quality steward behind it. It joins our existing position in Bajaj Holdings & Investment (India: Financials), which is the holding company of siblings Rajiv and Sanjiv Bajaj, who have an exemplary track record of delivering shareholder returns. 

Elsewhere, we continued to build a position in Sundaram Finance (India: Financials), a high-quality and conservative financial services institution stewarded by the Sundaram Group. Meanwhile, to benefit from lower valuations, we added to our existing holdings in Tube Investments (India: Consumer Discretionary), Blue Dart Express (India: Industrials), SKF India (India: Industrials), Elgi Equipments (India: Industrials) and Cholamandalam Financial Holdings (India: Financials).

To fund these additions, we sold our positions in Havells (India: Industrials), Carborundum Universal (India: Materials) and Bosch India (India: Consumer Discretionary). Although we continue to believe in these businesses’ long-term growth potential, we believe there are better returns to be achieved elsewhere given their relative valuations.

The strategy’s performance over the past quarter (and over the past year) has been disappointing. We would have hoped that it would have exhibited greater resilience relative to the market. At the same time, however, we would caution that a single quarter is too short a timeframe over which to measure equity returns. When considering the future of the underlying businesses that we invest in, we look several years – and sometimes decades – into the future. On reflection, we could perhaps have trimmed position sizes more aggressively in our strongest performing industrial names. At the same time, however, we still see good value when considering their long-term potential.

Two answers spring to mind here: firstly, that we are not investing in the index, we are trying to find the highest-quality companies we can and secondly, we keep a keen eye on valuations and position sizes to try and ensure our investments deliver good, long-term returns whilst also protecting capital. To that end we still see lots of reasons to be positive about the outlook for our India holdings.

We have found a few new ideas at acceptable valuations and during the period we purchased Narayana Health (India: Health Care) which is supplying affordable, private healthcare in India. We also increased our holding in insurer ICICI Lombard (India: Financials).

We sold Mahindra Finance (India: Financials) as we struggled to build conviction in the business trajectory.

As far as monitoring valuations, we slightly trimmed our holdings in Mahindra & Mahindra (India: Consumer Discretionary) and Dr. Lal PathLabs (India: Health Care). Our belief in their long-term success remains robust. 

More generally, we continue to assess all our investments from a bottom-up perspective, trying to gauge the quality of the people and businesses that we are backing with your money. We are doing our best not to overpay for these investments and to hold them for the long term. We continue to believe that this is the bedrock of long-term capital preservation and growth.

[1] Source: FactSet. USD total returns.

For us, India remains the same exciting investment destination that it has long been and for the same reasons too: a multitude of fantastic companies providing necessary goods and services to a rapidly developing population which leaves long-term and quality-focused investors spoilt for choice.

In terms of new positions, we bought ICICI Lombard (India: Financials), one of India’s largest private sector general insurance companies. ICICI Lombard is addressing the underinsurance gap in India by expanding access to insurance products to help individuals, businesses and families better manage risks. The company is well-managed and our conviction has grown enough to purchase for the strategy.

In the quarter, we increased our positions in Cholamandalam Financial Holdings (India: Financials), Aavas Financiers (India: Financials), Blue Dart Express (India: Industrials), Tata Communications (India: Communication Services) and SKF India (India: Industrials) as we believe they are all reasonably valued for good, long-term returns. We partially funded these by reducing our positions in CG Power (India: Industrials), as valuations continued to creep up, and HDFC Bank (India: Financials). We sold RBL Bank (India: Financials) and Kotak Mahindra Bank (India: Financials) as we felt there are currently better opportunities, at the margin, elsewhere. 

Positive news flow notwithstanding, we continue to assess all our investments from a bottom-up perspective; trying to gauge the quality of the people and businesses that we are backing with your money, and doing our best not to overpay for these investments and to hold them for the long term. We continue to believe that this is the bedrock of long-term capital preservation and growth.

We received a broker email the day before election results listing companies that should be beneficiaries of a strong result for the incumbent government. We were particularly pleased to note that out of the 50 companies named, we held only one in our portfolios. Our investment approach is to invest in companies with enduring long-term qualities. Their only competitive advantage is to deliver value to their customers every day. And they maintain this advantage by focussing on a combination of quality, innovation and trust. These attributes can only be built patiently over decades. Any dependence on politics or favourable regulations is a risk and at best a short-lived advantage – not the enduring quality we seek in our businesses.

Rapid urbanisation and water stress represent key risks for many of our companies. We commissioned a research tender to better understand water stress across our portfolio companies. We also exchanged thoughts with management at portfolio companies on the risks of rapid urbanisation. We will continue to evolve our understanding of these topics and the context in which our companies operate.