Marketing material for professional investors or advisers only Karan Datta - Chief Business Officer, Axis Asset Management Ashwin Patni - Fund Manager & Head of Products, Axis Asset Management Jigar Gandhi - India Investment Specialist, Axis Asset Management Resurgent India March 2018
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Resurgent India - SchrodersWhy does a dedicated India allocation for foreign investors make sense? 8 Source: Axis AMC. Well run companies that are profitable and efficient capital
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Marketing material for professional investors or advisers only
Karan Datta - Chief Business Officer, Axis Asset Management
Ashwin Patni - Fund Manager & Head of Products, Axis Asset Management
Jigar Gandhi - India Investment Specialist, Axis Asset Management
Resurgent India
March 2018
What we intend to cover today
Why India? Why Schroders? Why now?
1
Indian Equity as an asset class
3
Source: Bloomberg, data as at 31 December 2017.
Indian market performance stands out over short term as well as long term
37.0%
7.2% 7.3% 8.8%
34.3%
6.6%
1.9%
4.0%
20.1%
7.2%
9.5%
4.4%
21.6%
7.1%
8.6%
4.3%
0%
5%
10%
15%
20%
25%
30%
35%
40%
1 year 3 Years 5 Years 20 yearsMSCI India MSCI EM MSCI World MSCI ACWI
Variation in top and bottom stocks over the last 10 years
% compound annual growth rate (CAGR)
CY 07–17
Top quartile 17.9
BSE 100 index 5.9
Bottom quartile (16.9)
Our strategy relies on bottom up selection of quality companies that can deliver sustainable growth
Source: Bloomberg, Axis AMC Analysis Past performance may or may not be sustained in future. Data as on 30 November 2017.
High dispersion in performance of stocks favours active managers
4
– Leading companies tend to grow faster, capture disproportionate part of profit pool
– Large dispersion in performance between quality stocks and rest of market
– Bottom-up strategies perform well
5
Source of data: CRISIL, NSE, data as at 31st Dec 2017. Returns in INR
Active managers have outperformed in India
10 years performance (% pa)
CRISIL-AMFI Equity Fund Performance Index 8.9%
Nifty 50 Index 5.5%
Large Cap vs. Midcap
6
Source: MFI Explorer, data as at 28th Feb 2018. Returns in INR
Large mid cap opportunity available
5.6
13.0
7.1
14.4
21.1
10.5
0
5
10
15
20
25
3 Years 5 Years 10 Years
Nifty 50 Nifty Free Float Midcap 100
(%)
India-focused offshore funds are
seeing strong flows
Active funds get a higher share unlike
other markets
Source: Morningstar Offshore Fund Spy report, as at 31st Dec 2017
- Total assets in India focussed offshore funds grew from USD 33 bn to USD 65 bn
- However, the share of passive funds (ETFs) has been on downward trend
- % of ETFs in total India focussed offshore funds, fell to 19.7% as compared 25% (2 years back)
Yearly estimated net flows (USDbn)
7
2.5
4.3
-2.5
6.5
2014 2015 2016 2017
Why does a dedicated India allocation for foreign investors make sense?
8
Source: Axis AMC.
Well run companies that are profitable and efficient capital
allocators
Large, growing economy/market that is under-represented in regional/global benchmarks
Breadth in mid-cap space not typically captured by regional
Source: CLSA, data as at 31 December 2017. 1 CL – CLSA estimate
Economy, earnings growth are likely to stabilise post recent disruptions
7%
10%
3%
-4%
8%
14%
21%
16%
-10%
-5%
0%
5%
10%
15%
20%
25%
FY13 FY14 FY15 FY16 FY17 FY18CL FY19CL FY20CL1
Average 16.1
7
9
11
13
15
17
19
21
23
Feb-06 Feb-08 Feb-10 Feb-12 Feb-14 Feb-16 Feb-18
Nifty Best P/E Average
Average 16.1
Nifty 50 Index Forward P/E
13
Source: Bloomberg, P/E – Price to Earnings. Data as at 28th Feb 2018.
Valuations are high relative to history, however earnings growth kicking in will help normalise
FII and DII Flows (USDmn)
14
Source: Bloomberg, Kotak Institutional Equities, data as at December 2017. FII- Foreign Institutional Investor. DII – Domestic Institutional Investors (Includes Bank, DFIs, Insurance, New Pension Scheme and MF).
Domestic savings finally flowing into stocks, should support market from global liquidity swings
24,548
19,754 16,162
3,274 2,903
7,533
(10,854) (12,942)
(5,090)
10,315
5,425
14,092
-17,000
-12,000
-7,000
-2,000
3,000
8,000
13,000
18,000
23,000
28,000
CY 12 CY 13 CY 14 CY 15 CY 16 CY 17
FII Domestic
Factors to watch out for in 2018
15
Source: Axis AMC.
8879.6 Micro factors : Revival in Ministry of Micro, Small and Medium
Enterprises (MSME) and Small and Medium Enterprises (SME) sectors post GST and higher government
spends
Macro factors : Oil prices, Inflation and Interest Rates
Pick up in rural India especially after a couple of years of bad
monsoon and low income levels as MSP and rural infra was curtailed
Why Schroders and Axis?
Schroders has well positioned Indian equity capabilities
17
Source: Schroders. *Schroder International Selection Fund is referred to as Schroder ISF throughout this presentation.
Product Schroder ISF* Indian Equity Schroder ISF Indian Opportunities
Objective Outperform the index by 2% p.a. To be a top performer and outperform the index by > 4% p.a.
Team Managed by Schroders with input from Axis Advised by Axis – Axis responsible for performance
Cap Bias Large cap Diversified, all cap
# of Stocks 40–60 stocks 30–70 stocks
T.E. 2%–5% 4%–10%
– Axis Asset Management Company was set up in January 2009 as a wholly-owned subsidiary of Axis Bank
– Axis Bank is the third largest private sector Bank in India
– Expansive distribution network in 3,589 domestic branches and 13,977 ATMs across the country
– Management team with extensive experience
– One of the fastest growing asset managers in India with close to USD 12bn in AuM
– Schroders acquired a 25% stake in September 2012
– Manages local funds under the Axis Mutual Fund range and advises Schroders on its global India product range
18
Source: Axis AMC, Axis Bank, Axis AMC AuM data as at 28 Feb 2018, Axis Bank data as of 31 Dec 2017.
About Axis Asset Management Company
– Axis is a bottom-up investor that focuses on fundamental research driven investing
– Our philosophy is focused on identifying quality companies that have a sustainable medium to long term growth potential run by capable managements
19
Source: Axis AMC. For illustrative purpose only.
Key pillars of Axis approach
Aim to deliver superior risk adjusted returns
High conviction investors
Growth biased – focusing on
sustainable growth
Look for quality businesses
The 4 stage equity investment process
20
Source: Axis AMC.
Identify universe
Identify companies with sustainable earnings growth potential, credible management and acceptable liquidity
Analyze fundamentals to assess fair value of stocks in our universe
Portfolio is constructed bottom-up, stock-by-stock while adhering to top-down risk parameters, liquidity profile and volatility targets
Take profit or re-balance portfolio to ensure investment objectives are met. Examine need for hedging against event risks
Risk management
Research
Portfolio construction
Portfolio monitoring
Risk management is central to the investment process
21
Source: Axis AMC.
Prudent product design to reduce risk
Disciplined investment process which is clearly articulated and focused on risk
Portfolios are regularly tracked across various parameters like tracking error, information ratio, volatility and downside risk
Product level
Process level
Risk monitoring
Schroders’ India funds: Performance summary As at 28 February 2018 (In USD)
22
Source: Schroders. Returns quoted are based on A Accumulated Share Class, dividend re-invested, net of fees. Since Inception date: 10 November 2006. For illustrative purpose only. Past performance is not a guide to future performance and may not be repeated.
Schroder ISF Indian Equity In USD, net of fees
3 months %
6 months %
YTD %
1 year %
3 years % p.a.
5 years % p.a.
Since inception
% p.a.
Fund 2.1% 4.8% -1.5% 23.6% 6.7% 12.6% 7.4%
MSCI India Net TR 1.2% 3.9% -3.5% 21.2% 4.1% 8.7% 5.6%
Risk Considerations Risk Considerations – Schroder ISF Indian Equity The capital is not guaranteed. In order to access restricted markets, the fund may invest in structured products. Should the counterparty default, the value of these structured products may be nil. Investments denominated in a currency other than that of the share-class may not be hedged. The market movements between those currencies will impact the share-class. The fund will not hedge its market risk in a down cycle. The value of the fund will move similarly to the markets. Emerging markets will generally be subject to greater political, legal, counterparty and operational risk. Emerging equity markets may be more volatile than equity markets of well established economies. Investments into foreign currencies entail exchange risks. The fund may hold indirect short exposure in anticipation of a decline of prices of these exposures or increase of interest rate.
23
Schroders’ India funds: Performance summary As at 28 February 2018 (In USD)
24
Source: Schroders. Returns quoted are based on A Accumulated Share Class, dividend re-invested, net of fees. Since Inception date: 10 September 2013.For illustrative purpose only. Past performance is not a guide to future performance and may not be repeated.
Schroder ISF Indian Opportunities 3 months
% 6 months
% YTD
% 1 year
% 3 years
% p.a. 5 years
% p.a. Since inception
% p.a.
Fund 0.8% 5.6% -4.4% 28.8% 7.1% NA 17.3%
MSCI India Net TR 1.2% 3.9% -3.5% 21.2% 4.1% NA 12.4%
Risk Considerations Risk Considerations – Schroder ISF Indian Opportunities The capital is not guaranteed. Investments denominated in a currency other than that of the share-class may not be hedged. The market movements between those currencies will impact the share-class. Investments in small companies can be difficult to sell quickly which may affect the value of the fund and, in extreme market conditions, its ability to meet redemption requests upon demand. The fund will not hedge its market risk in a down cycle. The value of the fund will move similarly to the markets. The fund will be subject to the respective market movements of a limited number of sectors and/or countries of the investment universe. The fund may invest in other regions than the primary universe of the Fund resulting in an additional currency and interest rate risk. Emerging markets will generally be subject to greater political, legal, counterparty and operational risk.
25
An emerging opportunity
Indian Fixed Income
Risk Return Tradeoff
27
Bloomberg Barclays US Treasury Index
Bloomberg Barclays Global Aggregate Unhedged Index
JP Morgan GBI EM Broad Diversified Index
JP Morgan Emerging Market USD denominated Bond
index
Indian Bond Market – CRISIL Composite Bond
Fund Index (USD)
-1%
0%
1%
2%
3%
4%
5%
6%
-1% 1% 3% 5% 7% 9% 11%
Source: Schroders, Bloomberg, Axis AMC Internal Analysis. All returns are annualized and mentioned in terms of USD net of fees. Data as at 31 December 2017.
Indian market has delivered attractive risk adjusted performance relative to Emerging Markets (EM), Global markets
5 yr
Ret
urns
(ann
ualiz
ed)
Risk (Std Dev – 5 yr)
28
Source: Bloomberg, Axis AMC Internal Analysis. All returns are annualized and mentioned in terms of USD net of fees. Data as on 31 December 2017. Past performance is not a guide to future performance and may not be repeated.
Axis India bond funds performance relative to EM, HY strategies
15.0%
9.1%
6.7%
13.2%
4.1%
1.9%
8.7%
6.1%
4.5%
8.0% 7.0% 6.4%
0%
2%
4%
6%
8%
10%
12%
14%
16%
1 year 3 years 5 years
India Bond - Axis Regular Savings Fund (Likely average B-) Asian Local Currency Bond (A-)
Emerging Market Bond (BB) Global High Yield (BB-)
Return (%)
Key drivers that make Indian Bond market attractive for foreign investors
29
Source: Axis AMC Internal Analysis.
Economic diversification
India’s Rate Cut cycle is different from other
markets
Indian markets offer lucrative yields as
compared to other emerging markets
India has no/minimal weight in widely followed
global bond indices
Improving corporate bond market with a wide array of investment options across
ratings and maturities
Competitive yields
Portfolio diversification
Depth of Indian bond
market
iBoxx Asian Local Currency Bond Index (Top country weights)
30
Source: Schroders. Data as on 26 February 2018.
…Yet India is under represented Offers a great diversification to global bond portfolios
19.9
13.7
13.7 7.3
45.4
South Korea China Singapore India Others
– Foreign holdings of Indian bond market have increased sharply over the past few years, rising from USD21bn at the end of 2013 to USD70bn in December 2017
– Yet, it is still one of the lowest in Asia with offshore investors owning only 5% of the outstanding stock
31
Note: NSDL FPI Monitor. Data as on 28 February 2018.
Foreign investors continue to show interest in Indian bond market
0
20
40
60
80
100
120
Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Feb-18
Coporate Bonds G-Sec
Rising FPI investments in Debt
Government securities (G-sec)
– Quota
– Accessing local trading platforms difficult for foreign investors
– Lack of secondary market liquidity
– For trading, secondary market is more active for G-sec, which records a daily trading volume of USD 6–8bn. However, daily corporate bond trading is relatively low at USD 0.5–1bn
– Relatively higher trading costs
32
Source: Axis AMC Internal Analysis, HSBC. Data as on 31 January 2018.
However, foreign investors find it difficult to invest in Indian bond market
33
Source of data: ACEMF, Bloomberg, RBI, BIS, 2013 refers to 31 August 2013 and current refers to latest data as on 28 February 2018.
Indian economy has built macro resilience since taper crisis
Taper crisis (2013) Current
CPI inflation 9.5% 5.1%
FX reserves (USDbn) 275.5 421.7
Current account deficit -4.7% -1.4%
Fiscal deficit -4.8% -4.0%
Crude oil (per barrel) $116.2 $65.8
Currency (INR) 65.7 65.2
Real rates (%)
34
Source: Bloomberg. Data as on 31 December 2017.
Better inflation management has led to investors getting positive real rates
-4
-3
-2
-1
0
1
2
3
4
5
6
Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17
35
Source of data: Trading economics, Data available as on 28 February 2018.
India offers competitive yields against other EM
Country GDP Policy Rate Inflation 10 year yield
Turkey 11.10% 8.00% 10.35% 11.62%
Brazil 2.10% 6.75% 2.86% 9.57%
South Africa 0.80% 6.75% 4.40% 8.20%
Russia 1.80% 7.50% 2.20% 7.08%
India 7.20% 6.00% 5.07% 7.75%
Indonesia 5.19% 4.25% 3.18% 6.61%
Philippines 6.60% 3.00% 4.00% 6.79%
China 6.80% 4.35% 1.50% 3.87%
Malaysia 5.90% 3.25% 2.70% 4.03%
Thailand 4.00% 1.50% 0.42% 2.40%
Singapore 3.60% 0.83% 0.00% 2.34%
Currency vs. US Dollar (5 years)
36
Source: Bloomberg. Data as on 28 February 2018.
Indian Rupee continues to be amongst the strongest EM currencies
-53%
-46%
-39%
-30%
-23% -22% -21%
-16%
-6% -5% -2%
-60%
-50%
-40%
-30%
-20%
-10%
0%
Turkey Russia Brazil Indonesia South Africa Philippines Malaysia India Singapore Thailand China
To summarise
Key takeaways
Why India? Multi-year, multi-asset
opportunity, under-represented in global portfolio
Why now? Greater global recognition Markets attractively poised
Why Schroders? Axis capability, strong track record and differentiated
investment process
38
Important information This presentation does not constitute an offer to anyone, or a solicitation by anyone, to subscribe for shares of Schroder International Selection Fund (the “Company”). Nothing in this presentation should be construed as advice and is therefore not a recommendation to buy or sell shares. Subscriptions for shares of the Company can only be made on the basis of its latest Key Investor Information Document and prospectus, together with the latest audited annual report (and subsequent unaudited semi-annual report, if published), copies of which can be obtained, free of charge, from Schroder Investment Management (Luxembourg) S.A. An investment in the Company entails risks, which are fully described in the prospectus. Past performance is not a reliable indicator of future results, prices of shares and the income from them may fall as well as rise and investors may not get the amount originally invested. Schroders has expressed its own views and opinions in this presentation and these may change. This presentation is issued by Schroder Investment Management Ltd, 31 Gresham Street, EC2V 7QA, who is authorised and regulated by the Financial Conduct Authority. For your security, communications may be taped or monitored. Risk Considerations – Schroder ISF Indian Opportunities The capital is not guaranteed. Investments denominated in a currency other than that of the share-class may not be hedged. The market movements between those currencies will impact the share-class. Investments in small companies can be difficult to sell quickly which may affect the value of the fund and, in extreme market conditions, its ability to meet redemption requests upon demand. The fund will not hedge its market risk in a down cycle. The value of the fund will move similarly to the markets. The fund will be subject to the respective market movements of a limited number of sectors and/or countries of the investment universe. The fund may invest in other regions than the primary universe of the Fund resulting in an additional currency and interest rate risk. Emerging markets will generally be subject to greater political, legal, counterparty and operational risk. Risk Considerations – Schroder ISF Indian Equity The capital is not guaranteed. In order to access restricted markets, the fund may invest in structured products. Should the counterparty default, the value of these structured products may be nil. Investments denominated in a currency other than that of the share-class may not be hedged. The market movements between those currencies will impact the share-class. The fund will not hedge its market risk in a down cycle. The value of the fund will move similarly to the markets. Emerging markets will generally be subject to greater political, legal, counterparty and operational risk. Emerging equity markets may be more volatile than equity markets of well established economies. Investments into foreign currencies entail exchange risks. The fund may hold indirect short exposure in anticipation of a decline of prices of these exposures or increase of interest rate. Third Party Data Disclaimer Third party data is owned or licensed by the data provider and may not be reproduced or extracted and used for any other purpose without the data provider's consent. Third party data is provided without any warranties of any kind. The data provider and issuer of the presentation shall have no liability in connection with the third party data. The Prospectus and/or www.schroders.com contains additional disclaimers which apply to the third party data. Forecasts The forecasts stated in the presentation are the result of statistical modelling, based on a number of assumptions. Forecasts are subject to a high level of uncertainty regarding future economic and market factors that may affect actual future performance. The forecasts are provided to you for information purposes as at today’s date. Our assumptions may change materially with changes in underlying assumptions that may occur, among other things, as economic and market conditions change. We assume no obligation to provide you with updates or changes to this data as assumptions, economic and market conditions, models or other matters change.