Liontrust India Fund Q4 2021 review | Insights | Liontrust Asset Management PLC

Past performance does not predict future returns. You may get back less than you originally invested. Reference to specific securities is not intended as a recommendation to purchase or sell any investment.

Over the fourth quarter, the Liontrust India Fund returned -1.9%, versus the MSCI India Index gain of -0.7% and the IA India return of -0.1%*.

The Indian Tax Commissioners have a capital gains regime in place whereby foreign investors are charged a tax on any capital gains on Indian holdings. There is a long term tax rate and when securities are sold, this crystallises the gains which are then taxed. Indian funds typically book a deferred tax liability to cover where a fund has gains and is due to pay this tax. During the quarter there was a change in the Fund’s accounting policy which meant the Fund has also begun to accrue for the capital gains tax due on unrealised capital gains as well as on realised capital gains. This change of policy has meant the fund’s NAV was reduced by 2.5% to reflect this additional accrual.

The final quarter of the year was relatively subdued in terms of overall returns in India, coming at the end of an extremely positive year for the market. The MSCI India Index returned -0.7%, a little ahead of the MSCI Emerging Markets index (-1.6%). Economic growth remains in recovery mode and has proven resilient to returning waves of Covid infections, including the most recent Omicron variant, which has largely been restricted to larger cities and has not caused any major lockdowns. GDP growth came in at 8.4% in the quarter, cementing India’s position as the fastest growing major emerging market economy. This in turn led to ongoing recovery and positive momentum in corporate earnings.

The banking sector in particular has been showing encouraging signs of life, with loan growth picking up impressively, on top of improving asset quality and profitability. We view the re-emergence of a credit cycle (both in terms of availability and demand for credit) as one of the key pillars of the Indian investment story over the coming years – drawing a line under the long period of retrenchment in bank lending, with balance-sheet repair being the key priority across sectors.

The best performing sectors across the period were the IT sector, led by ongoing capex at corporates at both the domestic and multi-national level, industrials – where encouraging signs of positive order flow have been evident – and also consumer discretionary where finally some green shoots have been emerging on the demand side in the auto sector. Elsewhere consumer staples continued to lag due to rising cost pressures and a weaker demand outlook.

The Fund’s positive relative returns were driven, in particular, by strong stock selection in the financials sector –with holdings Indian Energy Exchange and Bajaj Finance enjoying strong returns – and also in industrials where core holding Larsen & Toubro continues to enjoy a robust recovery driven by better underlying operating conditions reflecting in impressive new order flow. Finally, the healthcare sector also provided strong relative returns due to stock picking where a general underweight in large pharmaceutical companies was helpful, whilst the positions in smaller medical equipment and hospital stocks performed much better than the general sector.

On the negative side a pull-back in the previous quarter’s winners in the real estate sector weighed on relative returns, and also the recovery in consumer discretionary stocks, where the Fund has been underweight proved a drag to relative performance.

It was a relatively quiet quarter in terms of Fund activity – though there were three new additions to the portfolio, funded by trimming of positions elsewhere, in particular in the real estate sector where profits from the sizeable gains of the previous quarter were taken. Positions were initiated in Max Healthcare, a hospital operator dominant in India’s National Capital Region, where we see considerable opportunities to improve payer mix as international medical tourism gradually returns and more-profitable tertiary care facilities are expanded. Further positions in Tata Motors – where we see recovery in overall auto demand in general allied to an impressive leadership in the emergent EV sector in India – and KEI Industries, a manufacturer of cables and steel wires and a wholistic beneficiary of rising capex in both the consumption (housing) and corporate (defense and telecommunications) sectors.

India in our view remains exceptionally well placed within the wider emerging market opportunity set, on the cusp of a multi-year investment cycle. After a very strong year, we would recognise that valuations are now relatively extended, which could mute near-term returns, but over the medium-term we think India remains extremely well set and favour the financials sector in particular as a key beneficiary of this investment recovery and especially the large-cap banks which have largely been passed over in the past several quarters.

Discrete years' performance (%)**, to previous quarter-end:

	Dec-21	Dec-20	Dec-19	Dec-18	Dec-17
Liontrust India C Acc GBP	36.6%	11.5%	-6.7%	-13.1%	24.9%
MSCI India	27.4%	12.0%	3.4%	-1.5%	26.7%
IA India/Indian Subcontinent	28.3%	11.2%	1.4%	-6.1%	27.7%
Quartile	1	2	4	4	3

*Source: FE Analytics as at 31.12.21

**Source: FE Analytics as at 31.12.21. Quartiles were generated on 07.01.22

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Key Risks

Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested. The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.

Investment in funds managed by the Global Equity (GE) team may involve investment in smaller companies - these stocks may be less liquid and the price swings greater than those in, for example, larger companies. Investment in funds managed by the GE team may involve foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The team may invest in emerging markets/soft currencies or in financial derivative instruments, both of which may have the effect of increasing volatility. Some of the funds managed by the GE team hold a concentrated portfolio of stocks, meaning that if the price of one of these stocks should move significantly, this may have a notable effect on the value of that portfolio.

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