Stewart Investors Indian Subcontinent Sustainability: July 2023 fund update

• Sashi Reddy and David Gait have a wealth of experience investing in India and Asia
• We like their focus on stewardship, sustainability, and high quality companies
• Their long-term performance track record has been exceptional
• 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 aims to grow capital over the longer term by investing in high quality companies who conduct the majority of their business in India, Pakistan, Sri Lanka and Bangladesh. Indian companies are the primary focus though.

We think the fund could add diversification to the Asian and emerging markets portion of a globally focused portfolio. India is home to the second largest population in the world and offers attractive growth potential as its economy continues to mature. Although, a fund focused on a single emerging country is a high-risk option, so investors should expect volatility and it should only make up a small part of an investment portfolio.

Manager

Sashi Reddy has been lead manager since December 2009 having joined Stewart Investors back in 2007, where he initially offered analysis and research support to portfolio managers, mainly concentrating on Indian companies.

David Gait serves as deputy manager and is Head of the Investment Team. Gait has been involved with the fund since 2007 having joined the company as a graduate in 1997. With 25 years’ experience, he’s played a crucial role in developing their Asian investment strategies.

Reddy and Gait receive support from a close-knit team of other fund managers and analysts. Whilst both manage other funds alongside this one, we believe they can comfortably handle these responsibilities given the overlap in approach and supportive team dynamic.

Process

The investment approach at Stewart Investors has been grounded in the same philosophy since 1988. This philosophy is built on stewardship, where fund managers treat investors' capital as their own and strive to grow wealth over the long term while minimising losses during periods of uncertainty.

‘Quality’ is a broad term in the investment world but for the managers at Stewart it centres around three key pillars: management, franchise, and financials. Reddy and Gait are hunting for companies with robust financial strength and sustainable growth prospects. They put great emphasis on the people and culture within businesses, only choosing to invest in companies led by management teams they trust and deem to have integrity. Many of the companies they own also still have a degree of founding family ownership.

The team pay little attention to the benchmark and construct the portfolio using a ‘bottom-up’ approach. They currently invest in 35 companies with industrials, financials, and consumer discretionary accounting for over 55% of the fund. Although they can invest across the subcontinent, the managers mainly concentrate on India, which makes up over 90% of the fund. Large and medium-sized companies are the primary focus, but they also invest in some higher-risk smaller companies.

As long-term investors, they don’t tend to make too many changes. For example, 5 of their top 10 holdings were bought over a decade ago. Recently, the managers purchased IT services provider, Cyient and financial services company, Mahindra and Mahindra. In contrast, they sold their position in Infosys - another IT services business - and long-term holding in Pidilite Industries on valuation grounds.

Culture

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. It also places emphasis on recruiting and maintaining great people. Every manager and analyst advocate the team's overriding philosophy.

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, though positively Stewart Investors remains an independent investment team.

ESG integration

For the team at Stewart Investors, ESG considerations are much more than a label or box to be ticked. Taking these factors into account is a natural extension of the same investment process they’ve used for decades. The team’s philosophy is founded on stewardship – when they make an investment, they see themselves as part-owners of the business and want to make sure it’s run in a way that’ll benefit all shareholders.

ESG issues form a core part of this. For example, they don’t like companies that make reckless decisions in the pursuit of short-term gains, rather than focusing on longer term, more sustainable growth. A business shouldn’t exploit its workforce, take advantage of tax loopholes, or skirt around industry legislation. Importantly, it should cause little, if any, harm to the environment around it. First Sentier has made a firm-wide commitment not to invest in companies whose primary business is to make cigarettes (or other tobacco products), or controversial weapons.

Cost

The fund has an ongoing annual charge of 0.99%. Our platform charge of up to 0.45% per annum also applies.

Performance

Reddy and Gait have built up an enviable track record since they’ve been named managers on the fund. Over the past ten years, the fund returned 315.85%* vs 215.62% for the IA India/Indian Subcontinent sector. We put this down to their ability to add value picking great companies, regardless of the sector they’re in. Past performance isn’t a guide to future returns.

Their 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 (to end of June 2023) the fund has returned 16.08%, outperforming the IA sector return of 12.38%. Our analysis shows that Tube Investments, CG Power and Mahindra & Mahindra were among the top contributors to returns. On the other hand, Aavas Financiers, Tarsons Products and Blue Dart Express weighed on performance. Despite short-term headwinds, the manager remains confident in the long-term potential of all three companies.

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.

Past performance is not a guide to the future. Source: *Lipper IM to 30/06/2023.