Disappointing annual results followed by sharp rebound spell good news for JPMorgan Indian ahead of investment trust's five-yearly continuation vote this month.
JPMorgan Indian (JII) ended its financial year with returns well below its stock market benchmark and its shares on a widened discount, which is unfortunate timing as the investment trust faces a shareholder continuation vote at the end of this month.
Shareholder returns were worse, falling 10.9% in the 12-month period as the discount - or gap between the share price and net asset value (NAV) - widened from 11.4% to 14.5%.
Fortunately for the managers and JII's board, chaired by Richard Burns, the India stock market has rallied since October as the price of oil - a key import for the country - has crashed.
As a result shareholders, led by investment trust activist City of London Investment Management with a 21% stake, may be in a better mood when deciding where to place their crosses at the five-year continuation vote at the trust's annual general meeting on 30 January.
In the past three months JII shares have raced 15% higher on the back of a 12.6% rebound in the portfolio, beating the MSCI India's recovery of 8.7% in sterling terms.
That leaves shareholder returns over the five years since the last vote at 157.5%, comfortably ahead of the 90.7% benchmark return, although behind the 127.9% of its main rival, Aberdeen New India (ANII), which under Hugh Young's team has generated a return of nearly 128%.
Both trail rival India Capital Growth (IGC) which over five years has returned 157.5% although shares in the mid-cap focused fund have plunged 23% in the past year as the former top performer has run out of steam.
Burns expressed his disappointment in the underperformance in JII's annual results but declared faith in the managers and the India investment case.
'The board believes that the long-term outlook for India remains positive and that JPMAM [JP Morgan Asset Management] has the resources and investment process to deliver returns for shareholders,' he said.
In addition to last year’s emerging market volatility, weakness in the rupee and the oil price hitting a four-year high, the managers attributed much of the portfolio’s underperformance to having no exposure to three index heavyweights.
Not holding energy company Reliance Industries (RIL.NS), IT business Infosys (INFY.NS), consumer staples giant Hindustan Unilever (HUVR.NS) – the latter two of which are top 10 positions in the Aberdeen portfolio – were said to have cost the trust 7% of its performance against the index.
Looking forward, the managers were also wary of April’s general election as prime minister Narendra Modi - responsible for a series of business friendly reforms in recent years - faced a struggle after his Bharatiya Janata Party lost ground in recent state elections.
‘While we will not even begin to make any political predictions on the prospects for the ruling Bharatiya Janata Party, volatility is to be expected,’ said Nair and Schroff.
‘However, investors have witnessed many election cycles in India and strong and agile businesses can always benefit from a challenging environment by gaining market share,’ they added.
All things considered JII should live to fight another day, but the sudden demise of BlackRock Greater Europe at the hands of a 100% tender vote last year shows the unexpected can occur.
If the trust does survive this month's ballot, it will still be under pressure. In 2016, the board renewed a promise to buy back up to 25% of shares should three-year growth in NAV fall below the MSCI India by September 2019. Current three-year NAV returns of 38.8% against 48% for the index clearly show there is more work to do.