Canadian investors will find plenty of opportunities in the world’s largest democracy

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Investors have long understood the value of seeking geographic diversification. But, as Anup Maheshwari, chief investment officer at IIFL Asset Management¹ (IIFL AMC), notes, family offices have probably not fully appreciated what Canadian institutional investors and pension funds already understand — the potential of seeking some of that diversification in India.

“Logically, global investors devote a large part of their capital to developed markets,” he says. “But they have a world of choice to achieve international diversification in emerging markets, often at attractive valuations.”

While investors seeking growth and diversification have historically looked to China as the go-to market for a country-specific allocation within emerging markets, India offers unique benefits. Its stock market is more diversified across sectors, and its economic cycles offer low correlation to developed markets such as the U.S.

“India represents a consumer-driven economy, with almost 85 per cent of the economy in the domestic sector,” he says. “The economy isn’t export dependent and much of it is devoted to traditional business sectors serving consumers —financial services, IT services, pharmaceuticals and automobiles, for example.”

The government of India estimates recent GDP growth at about 7 per cent for the one-year period ending March 31, 2023, one of the highest among large economies. An increasingly affluent young consumer class continues to drive that growth. More than 60 per cent of the country is under age 30, assuring a continued demographic dividend.

A drive for inclusion in the country’s financial system has seen more than 500 million citizens, many in rural areas, open their first bank account in recent years. “That’s broadened opportunities for entrepreneurship through increased access to capital, as well as expanded retail credit to encourage consumer activity and participation in the equity market,” Maheshwari says.

Indian equities perform well. The MSCI India Index indicates 11.42 per cent annualized gross returns for the 10-year period ending Jan. 31, 2023, eclipsing the MSCI Emerging Markets fund with just 6.97 per cent annualized gross returns over the same period.

Individual Indian companies are also heavy hitters. A research report from IIFL Securities, on which IIFL AMC collaborated, notes that 156 companies in India’s BSE 500 have compounded in value by 20 per cent or more annually over the past 20 years. The same could be said for only 35 companies in the U.S. S&P 500, five in China’s Shanghai Composite Index², and two in Japan’s Topix 500.

Canadian investors will find much that’s familiar in the world’s largest democracy where private enterprise dominates an investor-friendly economy with a commitment to rule of law.

“It’s a transparent financial system, where you can see economic growth reflected in the creation of shareholder value,” Maheshwari says. “We don’t see the same relationship between economic growth and equity markets in countries such as China.”

A 30-year veteran of the India investment sector, Maheshwari worked for 21 years at DSP BlackRock, a joint venture between Indian financial firm DSP Group and BlackRock. Since he took the helm at IIFL AMC, a full subsidiary of 360 ONE Wealth (formerly IIFL Wealth Management Ltd.), the firm has raised considerable global institutional capital.

360 ONE Wealth is one of the country’s largest wealth managers and continues to attract global institutional shareholders. Bain Capital, for example, owns a near-25 per cent share. Canada’s Fairfax Financial has been 360 ONE Wealth’s longest-running institutional backer, holding a stake in the firm for the last dozen years. Canadian institutional investors, who include some family offices, make up more than 20 per cent of the US$2 billion that IIFL AMC manages on behalf of global institutional investors.

“We’re a young and vibrant company that understands the lay of the land,” Maheshwari says. “We have access to a pool of entrepreneurs and companies who are 360 ONE Wealth clients and that allows us to literally assess companies from a 360-degree viewpoint, the way very few managers can across a breadth of asset classes.”

IIFL AMC’s investment framework divides equities available on the S&P BSE 500 into four quadrants, stressing growth stocks at a reasonable price. It’s overweight on “seculars” offering consistent profits and growth, but underweight on “value traps”, which may offer attractive valuation, but only periodic outperformance.

The rest of the portfolio is devoted to “defensives” — low-growth companies offering high return on capital, and “cyclicals” — businesses requiring high capital input, but offering high profits during boom periods.

“From time to time, we selectively take calls between stocks in the cyclical and defensive quadrants,” Maheshwari says. “By doing so, we’ve generated alpha for investors through market cycles.”

That investment strategy has seen the IIFL Focused Equity Fund produce annualized returns of 14.44 per cent^* since its inception in October 2014 — about 3.5 per cent of alpha over benchmark (S&P BSE 500 TR).

IIFL’s commitment to building relationships with Canadian pension funds, asset managers, and family offices is reflected in the establishment of a Toronto office.

“We aspire to be the gateway to Indian investments for Canadian investors,” says Viren Ratnaswami, director at IIFL Capital (Canada) Limited. “We believe there’s a long runway ahead for India, as its sustainable growth path propels the country from the fifth to third largest economy in the world — and ample opportunities for Canadian family offices to add value to their portfolios.”

1. IIFL Asset Management will be rebranded to 360 ONE Asset following regulatory approval.
2. China’s Shanghai Composite Index tracks daily price performance of all A-shares and B-shares listed on Shanghai stock exchange. As of Sep 30, 2022 there were approximately 1,957 stocks in the index.

*  Past performance is not a guarantee of future results.

For Canadians seeking more information on IIFL or investing in India, please contact Viren Ratnaswami.

For more information on PBY Capital, visit www.pbycapital.com

PBY Capital Limited is registered as an exempt market dealer and an investment fund manager with Canadian provincial securities regulatory authorities, servicing family offices and their professionals. For more information, visit: www.pbycapital.com.

This story was created by Content Works, Postmedia’s commercial content division, on behalf of PBY Capital Limited, which is a member and content provider of this publication. The opinions and information provided in this article are not to be construed as personal, legal, accounting, taxation, or investment advice, or as an endorsement of any entity.