Fundsmith Emerging wants to invest more in India – in its interim report, published today, Fundsmith Emerging Equities is proposing a change to its investment policy.
Investment Policy Review
“As shareholders may be aware, the Board reviews the Company’s Investment Policy at every meeting. The Board has noted that approximately 38% of the portfolio is currently comprised of companies which generate their profits and cash flows from the Indian economy. This means we are approaching the limit which states that not more than 40% of the Company’s gross assets (at the time each investment is made) can be invested in shares issued by companies domiciled in any single jurisdiction.
As your Investment Manager continues to evaluate a number of compelling investment opportunities in India (notwithstanding the risks association with the jurisdiction), the Board is considering whether it may be appropriate to increase the single jurisdiction limit to provide greater flexibility to take advantage of such opportunities. Should any material change to the limits in the Investment Policy subsequently be proposed, they would be subject to the approval of shareholders.”
Interim figures
During the first half of the year, the net asset value grew by 9.2%. The market value of the shares increased by 9.6% over the period At the period end, the shares stood at a 1.9% premium to the NAV. Over the same period, the benchmark, (the MSCI Emerging & Frontier Markets Index measured on a net sterling adjusted basis) rose by 12.6%. The fund is now 20.9% behind the benchmark since launch (as at 30 June 2017).
Comment on India
“Predictions are always dangerous but the likelihood is that the largest direct influence on our portfolio occurred on the first day of the second half of the year. On 1(st) July the new Indian GST came into force. There is plenty to worry about with this development. It is not as simple as we might wish with four main tax bands plus special rates for precious and semi-precious stones, a separate rate for gold and a surcharge on top of the top rate band for carbonated drinks, luxury cars and tobacco products. It has led to tussles between producers and distributors and retailers about who will bear any impact on profit margins as well as some destocking in advance of the change.
It would be reasonable to expect disruption which will affect our Indian companies as a result. They constituted 38% of the portfolio at 30(th) June 2017. Moreover, this comes shortly after the disruption caused by the demonetisation move last November so that the current and near term sales numbers from this largest segment of our portfolio will be difficult or impossible to interpret, but probably not good.
However, despite all these drawbacks it seems likely that the implementation of the GST is the first and a major step on the route to making India one national market, at least from a tax perspective, for the first time and so will become another plank in the economic transformation of what seems destined to become the world’s largest country by population. If this proves to be the case then FEET should be well positioned to benefit but even so we would be wise to buckle our seat belts for a bumpy ride. Although of course, there are no seat belts on a motorbike.”
FEET : Fundsmith Emerging wants to invest more in India