Indian Subcontinent All Cap

Over the quarter, we bought Bajaj Auto (India: Consumer Discretionary), a leading manufacturer of automobiles. It joins our existing position in Bajaj Holdings & Investment (India: Financials), which is the holding company of siblings Rajiv and Sanjiv Bajaj, who have a good track record of delivering shareholder returns.

We continued to add to the position size of our holding in Sundaram Finance (India: Financials), a financial services institution led by the Sundaram Group. To benefit from lower valuations, we also 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 Havells (India: Industrials), Carborundum Universal (India: Materials) and Bosch India (India: Consumer Discretionary). Although we continue to believe in the long-term growth potential of these businesses, we believe there are better returns to be achieved via other ideas. 

The fund’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. At the same time, however, we would caution that a single quarter is too short a timeframe over which to measure 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, perhaps we could have been more aggressive in selling the strongest performing industrial stocks. 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. 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 confidence in how the business was going to grow in the future.

We slightly trimmed our holdings in Mahindra & Mahindra (India: Consumer Discretionary) and Dr. Lal PathLabs (India: Health Care) due to higher valuations. Our belief in their long-term success remains strong. 

More generally, we continue to assess all our investments from an individual company perspective, trying to understand 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 a long time. We continue to believe that this is essential for protecting client money invested (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 like us spoilt for choice.

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 confidence in the business has grown enough to purchase for the strategy.

In the quarter, we added to the position size of 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 also sold RBL Bank (India: Financials) and Kotak Mahindra Bank (India: Financials) to fund the additions.

We continue to assess all our investments on an individual company basis, trying to gauge the quality of the people and businesses that we are backing with your money. We also do our best not to overpay for these investments and aim 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 an email from a research broker the day before election results which listed companies that should benefit from a strong result for the BJP. We were particularly pleased to note that out of the 50 companies named, we held only one of them. 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 high level of quality we seek in our businesses.

Rapid urbanisation and water stress represent key risks for many of our companies. We commissioned some external research understand more about water stress across our portfolio companies. We also engaged with company management on the risks of rapid urbanisation. We will continue to evolve our understanding of these topics and how they relate to our companies.