Asnani, who manages the $75.7m Matthews India Fund, looks for companies with pricing power that are not dependent on the progress of India's reforms. He finds potential investments when looking through the universe of India's small- and mid-cap companies.
“We focus on companies that are not necessarily dependent on reforms for their survival.”
The fund has no exposure to telecom services, utilities and the energy sector. Asnani said these sectors are excessively dependent on policies and some companies have governance issues.
The financial sector is the most favoured and Asnani has a preference for private banks compared to state-run banks as the former are more efficiently managed. Also, some state-run banks have significant non-performing loans.
The fund is overweight the consumer staple, healthcare and information technology sectors compared to its benchmark, the BSE 100 Index.
“Within healthcare, we mostly hold pharmaceutical companies as they have pricing power. But we have stayed away from hospitals due to governance issues. In the technology sector, pricing power is less. But return on capital is high.”
The fund’s top five holdings include Shriram City Union Finance, Ajanta Pharma, Taro Pharmaceutical Industries, ITC and IndusInd Bank.
He looks for companies with sustainable businesses, competent and honest management, strong corporate governance and a reasonable price.
“A good business is one which can sustainably grow and can generate a return on capital significantly higher than the cost of capital. If you can do that consistently again and again, then you have a competitive edge.”
Small cap volatility
Generally, the fund holds 30-60 companies in the portfolio. Nearly 53% of assets are small-cap companies, defined as those with market capitalisation below $3bn. Mid-cap companies, with a market capitalisation between $3bn-$10bn, account for 27% of the fund’s portfolio. The remainder is invested in large and mega-cap companies.
Small- and mid-cap companies are known for their volatility and events such as the much-anticipated US Federal Reserve rate hike that is widely expected later this year could roil the market. Asnani is not overly concerned, however.
“In fact, volatility of a stock is a boon,” he said. As the index falls, his team can take more exposure to stocks that have a strong fundamental story which they believe in.
“When small- and mid-cap stocks correct, then we will see some impact on our portfolio too. In the long run, if companies’ fundamentals are good, they will continue to do well.
“Stock selection is paramount in small- and mid-cap stocks.”
A look at the performance of the fund since its launch: