When I last wrote about India in October 2022, I noted that JPMorgan Indian (JII ) would face a continuation vote at its 2024 annual general meeting. At the time, I doubted it would survive given its net asset value (NAV) had trailed the MSCI India index by about 46 percentage points over the previous five years.

However, in the event at the AGM last month, the trust passed comfortably with just 3.8% of shares voted cast against continuation.

At first glance that’s quite surprising. After all, it is not as though the trust’s performance showed any improvement – since my article, investment returns have lagged the benchmark by almost another 10 percentage points. The discount is still way too wide too with the shares trading 19% below NAV. So why did it get the benefit of the doubt?

Timing may have been a factor – the 12-month period to end September 2023 covered by the last annual report was a rare period of outperformance, with NAV up 1.2% against the benchmark’s 0.7%. This illustrates the danger of relying on performance data from just one period.

Nevertheless, this enabled the outgoing chair Rosemary Morgan to cast a more positive light on performance. The report highlighted the trust’s strong average annual returns of around 11.3% in the past 10 years. That rather misses the point that shareholders have received far less because of the discount and would have been better off buying an index-tracking exchange-traded fund (ETF).

In response to the discount, the board has been buying back shares, but not particularly aggressively, with 3.6% repurchased in the last financial year. The chair’s statement talks about discounts widening on the investment trust sector as a whole and single country funds in particular, but this runs contrary to the actual experience of Ashoka India Equity (AIE ) – which I hold – and premium-rated India Capital Growth (IGC ) which have both been issuing stock. Of course, the difference here is their returns are miles ahead of JII’s.

There is a sop to those shareholders who are frustrated with returns in that it is possible that JII will be forced to implement a 25% tender offer at NAV less costs early in 2026. That’s if it fails to beat its benchmark by at least +0.5% per annum on average, over the five years to 30 September 2025.

The board’s argument for supporting the trust’s continuation was that the long-term outlook for India remains positive and that the manager has the resources and investment process to deliver returns for shareholders consistent with the company’s investment objectives.

The first part of that argument rings true. While he has his critics, the economic reforms of prime minister Modi have transformed the country. China’s self-inflicted woes encouraged capital to look for viable alternatives and India was an obvious choice. Its ‘Made in India’ initiative has attracted considerable foreign capital.

As an example, Apple has ramped up iPhone production in the country and is now said to be looking at shifting some of its new product development there.

Fast-paced consumer growth is set to make India the third-largest consumer market by 2027 according to a report by BMI (part of Fitch Solutions). In contrast to China, India’s workforce is growing, and infrastructure spending is also increasing, with $134bn allocated to it in the recent budget.

The managers are extremely optimistic about India’s long-term prospects, describing it as the one true growth equity market.

The second element is also true. After a shakeup two years ago, JII has three co-managers, Ayaz Ebrahim, Amit Mehta and Sandip Patodia, all with considerable experience. JPMorgan Asset Management has a big team of analysts dedicated to the country too.

However, the numbers suggest JPMAM needs to up its game. So, is there an issue with the investment process?

The fund managers’ approach is long term, patient (low turnover), prioritises quality and growth over valuation (ie, this is not a pure value approach), and tries to emphasise adding value through stock selection rather than asset allocation.

The bias to quality companies may be part of the problem. The managers focus on profitable businesses with ‘durable and predictable competitive advantages’, strong pricing power and robust balance sheets.

In a market as buoyant as India’s is currently, investors’ appetite for risk tends to be greater. Lower quality companies, start-ups and new IPOs attract much of the attention. EY India says there was a surge in IPOs in the second half of 2023, with 31 in the primary markets and a further 61 in the small and midsize enterprise (SME) markets in the final quarter alone. In this kind of environment, quality stocks often lag.

It is also true that large-cap stocks have underperforming small caps, a trend that flatters AIE and IGC compared to JII. However, in recent days, small caps have been selling off as investors take profits on the back of warnings about elevated valuations.

Regulators are also sounding notes of caution. The chair of the Securities and Exchange Board of India said a few days ago that it had observed signs of manipulation at both the trading and issuance levels in the SME space. It is asking fund managers of small and mid-cap funds to stress test their portfolios, fearing too much hot money has been flowing into these stocks.

The Indian market is also fairly expensive – MSCI India stood on 26 times historic earnings at 29 February. However, forecast earnings growth looks pretty strong with a forward multiple closer to 22. The price/earnings ratio on IGC’s benchmark, the S&P BSE Sensex, is about 25.

Navigating this landscape is hard and I do not envy the managers’ jobs. A more decisive market correction could trigger a flight to quality, which would work in JII’s favour. However, at the same time, perhaps the investment approach just means that JII is guaranteed to miss out on India’s next generation of exciting companies. I’m sticking with my AIE position, though I might top slice it.

James Carthew is head of research at QuotedData.

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