To provide long term capital appreciation by investing predominantly in listed mid and small cap companies with a smaller proportion in unlisted companies. Investments may also be made in large cap Indian companies where the Fund Manager believes long-term capital appreciation will be achieved. The Company may hold liquid assets (including cash) pending deployment in suitable investments. It is the Company’s declared policy not to hedge the exposure to the Indian Rupee.

Key points

• Mid cap focus
• Concentrated portfolio
• Team of experienced, ‘on the ground’ analysts
• Disciplined bottom-up investment process
• Liquidity screen
• Closed ended investment company

The process combines bottom-up stock picking with a top-down thematic overlay and a macro screen.

Thematic overlay

Structural trends and themes are explored from global, sector and country specific angles in order to identify appropriate target companies. Associated beneficiaries are sought out to avoid the crowded trade and we look for evidence of change not yet recognised by the market.

Stock picking

Strong management, sound financials, a competitive advantage and evidence of pricing power are all pre requisites. However the lynchpin to the process is Economic Profit Analysis (EVA) which is used to assess shareholder value creation. It calculates what profit remains after all costs have been deducted. These costs include the opportunity cost that must be paid to investors for use of their cash to support operations as well as the cost of those operations. EVA is a measure of true economic profit that looks beyond headline earnings and free cash flow and analyses returns on the amount of capital invested by the company. There is a strong correlation between a positive trend in EVA and positive stock performance over time.

For stocks to be considered for the portfolio, they must show:

1. A post tax return on invested capital (ROIC) in excess of the weighted average cost of capital (WACC), or if negative in the early years the trend should be rising. ROIC can be improved by aggressive valuation techniques, such as writing off goodwill and aggressively depreciating assets, to reduce the level of invested capital by removing items from the balance sheet. Adjustments are made to counteract this issue when it occurs.
2. A valuation premium (enterprise value / invested capital) that is acceptable for the ROIC-WACC spread
3. The stock must trade at least $1,000,000 a day

The Fund Manager can then make a judgment based on these factors alongside other valuation techniques, such as price to book and price to earnings, as to whether to pay the premium to invested capital for the EVA on offer.

Macro screen:

The following fundamentals are analysed:

1. Structural liquidity: looks at domestic and foreign net inflows and outflows
2. Cyclical liquidity: focuses on how money supply moves relative to production. If money supply is increasing but production is falling this is positive for markets as the money must be being invested in the financial markets.
3. Macroeconomics: relative to other emerging markets
4. Earnings momentum: relative to other emerging markets – are the earnings growing fast enough to justify the P/E ratio?
5. Valuation: relative to other emerging markets

Market capitalisation definitions

The Directors have approved a change in the parameters which the Company uses to define Small, Mid and Large Cap companies in the context of Indian equity markets. Historically a mid-cap company has been defined as being capitalised at between INR60bn and INR250bn. The Directors feel that it is more appropriate to define a mid-cap company as being capitalised at between US$2bn and US$7bn. The Directors will continue to monitor this on a regular basis.