Whilst it faces challenges in common with other fast-developing economies, there is little doubt that India, the world’s largest democracy and its second most populous country, offers exciting investment opportunities for more adventurous investors. Sadly, the bulk of the rural population remains impoverished, yet India boasts a burgeoning urban middle class, a youthful and ambitious population and continues to make great strides in fields including information technology.

One astute way to tap into the opportunities offered by this key member of the ‘BRIC’ nations - the acronym originally coined by Goldman Sachs’(GS:NYSE) Jim O’Neill to highlight the growth potential of emerging markets Brazil, Russia, India and China - is via the New India Investment Trust (NII). This closed-ended portfolio is managed by Aberdeen Asset Management’s (ADN) Asian equities team to generate long-term capital appreciation with dividend yield ‘of secondary importance’.

Aberdeen investment manager Kristy Fong describes India as ‘an exciting market’ and highlights its positive demographic profile in particular. However she concedes the nation, which has disappointed with slowing growth and faces a fiscal deficit, high inflation and a government mired in red tape, is still risky. Equity valuations, while fair, are also rich relative to other emerging markets.

Stock selection

‘One has to be very careful and very selective in investing in India,’ explains the manager, who is prepared to pay a premium for well run, resilient firms with strong track records offering quality growth and cashflow. ‘India is not a cheap market, but you do get more growth’, adds Fong.

When it comes to careful stock selection, New India Investment Trust is looking for those companies which are beneficiaries of rising domestic consumer spending. Fong says the team focuses on well-managed firms with ‘strong brand equity’, strong balance sheets and cashflow, and which treat minority shareholders well too. Currently, the fund is generally exposed to ‘pretty defensive’ names rather than cyclical corporate stories.

While the benchmark is the MSCI India Index, the portfolio is put together without reference to any index, which means there will be periods when performance varies significantly from MSCI India. Fong points out the investment trust holds just eight of the top 20 names in the index and has no positions in energy, which she says is the largest sector in India.

‘It is a pretty concentrated portfolio of 28 stocks (33 as at 28 Feb)’, says Fong. ‘We don’t care about the benchmark, we are driven by stock selection.’ A glance at the cumulative performance statistics shows this approach is paying off, with net asset value up 51.9% and the shares 50.5% ahead on a five-year view versus a 4.7% increase for the MSCI India Index.

Key themes

New India Investment Trust offers a collective play on three compelling themes. The first is what Fong describes as ‘the IT outsourcing story’, where portfolio constituents such as technology and outsourcing giant Infosys (500209:IN) and IT services heavyweight Tata Consultancy (532540: IN) ‘offer something different to the developed world’. These world-class operators have a global footprint and enable financial firms, many from Europe, the UK and US, to access India’s skilled, competitive and youthful workforce.

A second broad theme is the Indian domestic consumer, growing in affluence and becoming increasingly aspirational. ‘We have subsidiaries of Unilever (ULVR) and Nestle (NESN:VX) which offer exposure to the premiumisation theme’, enthuses Fong. She says that while Indian consumers can be price conscious, they increasingly hanker after branded consumer staples and once hooked, are loathe to go back to cheaper alternatives. One stock growing at pace is Godrej Consumer Products (532424:IN), a Mumbai-headquartered fast moving consumer goods company which makes everything from soaps to liquid detergents and is enjoying double-digit growth rates both at home and overseas.

A third theme is the Indian property and infrastructure story, although the managers are wary of ‘anything that is reliant on (Government) policy’, given the aforementioned issues with red tape. ‘But there are many ways to skin a cat’, explains Fong, who points out the fund is positioned to exploit India’s property and infrastructure development through building materials firms including cement manufacturer ACC (6155915: IN), whose parent company is Switzerland’s Holcim (HOLN: VX), as well as Grasim Industries (500300: IN) and Ambuja Cements (500425:IN).

Fast Fund Facts

New India Investment Trust (NII)

Share price: 237.8p

Market Cap: £140.4 million

NAV: 271.3p

Discount: 12.4%

Fund Manager: Aberdeen Asset Management

Ongoing charges: 1.5%

Annual management fee: 1.0%

Source: Aberdeen Asset Management

Top ten holdings (as at 28 Feb)

Company % of net assets

Infosys (500209: IN) 10.4

Tata Consultancy (532540:IN) 9.3

Housing Development Finance

Corporation (HDFC:IN) 9.1

ICICI Bank (532174:IN) 7.9

ITC (ITC:IN) 4.4

Godrej Consumer Products

(532424:IN) 4.3

Grasim Industries (500300:IN) 3.6

Hero MotoCorp (HMCL:IN) 3.6

Ambuja Cements (500425:IN) 3.6

Hindustan Unilever (HUVR:IN) 3.5

Source: Aberdeen Asset Management