3rd Sep 2019 11:18
(Alliance News) - India Capital Growth Fund Ltd on Tuesday said its net assets declined over the first half, underperforming its benchmark, as the fallout from Infrastructure Leasing & Financial Services Ltd continued to hurt the Indian market.
At June 30, the fund's NAV per share stood at 97.02 pence compared to 101.65p at December 31, a 4.6% reduction. Year-on-year, the fund's NAV per share is 10% lower from 108.09p.
The fund's total equity declined 4.5% over the first six months, slipping to GBP109.2 million from GBP114.4 million at the end of 2018.
The fund, which invests in mid and small cap companies listed in India, underperformed its benchmark, the BSE MidCap Total Return Index, in the first half, which lost 2.4%.
Chair Elisabeth Scott said: "Small and mid-cap companies have continued to be hurt by the fallout from the default last year of non-bank lender Infrastructure Leasing & Financial Services, with liquidity hard to access and the equity market treating harshly companies that fail to meet expectations."
IL&FS is an Indian infrastructure development and finance company. It was a AAA rated unlisted non-bank finance company, which India Capital Growth said "virtually" all mutual funds and banks were lender to IL&FS.
"Since its default, most mutual funds have seen redemptions in their debt schemes and have been pulling out money from any business they see as risky. Likewise, even well capitalised banks have turned risk averse and are consciously restricting credit growth," the fund added.
Scott continued: "Modi's landslide victory in the May elections was followed by a sharp rally in equities, reflecting the pro-business stance that investors believe Prime Minister Modi and the BJP party will take. However, the rally was short lived, overtaken by geopolitical concerns about international trade and domestic concerns about economic growth."
The fund's investment manager, Ocean Dial Asset Management added: "The period witnessed a wide divergence in performance between the large cap and mid cap stocks, a trend which has continued since 2018."
The Bombay Stock Exchange's large cap index, the BSE Sensex TR, gained 9.9%, in Indian rupee terms, in the first half compared to a 3.7% fall in the mid cap index.
"Select large caps have performed well on the back of healthy Foreign Institutional Investors net equity inflows of USD11 billion while the correction has been more evident in the small and mid-cap equities which took the brunt of selling pressure (this could be partly explained by Domestic Institution net outflows of USD1 billion, more severe earnings cuts and lower liquidity leading to more pronounced price movements) as investors continued to seek refuge in a limited number of large caps," the investment manager added.
Turning to the fund's portfolio, Ocean Dial said: "Outperformance stemmed mainly from stock selection in Materials, HealthCare and Information Technology, holding Cash in a falling market and being underweight in Utilities and Energy, while we were negatively impacted due to stock selection in Consumer Staples, Consumer Discretionary, Industrials and Financials."
Looking ahead, Scott believes valuations for mid cap firms in India have fallen to "attractive levels", which are being ignored by larger institutional investors.
"Offsetting this is the volatile nature of the politics in India, with concerns about India's relationship with Pakistan remaining in the headlines. Nonetheless, the board believes that the recent weakness gives investors a timely opportunity to invest in good quality, medium and small cap companies in India," added Scott.
Shares in India Capital Growth Fund were 0.1% lower in London on Tuesday at 72.44 pence each.
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