I've achieved that. Thank you, James. Thank you, Andrew. So for those of you who might not be familiar — hopefully most of you are familiar — the proposition obviously is that India is a fast-growing economy, and it is very importantly one that should be distinguished within all emerging markets that are clubbed together. The way we think about it — and we have an emerging markets fund and a trust as well that James was highlighting earlier — India is one of the better functioning, in fact as well functioning a democracy as any other in the world, developed or emerging, worldwide.
The data we've seen and the analysis that we've done over the last 30 years: democratic markets have always traded at a substantial premium to authoritarian regimes. Think of the multiples that the market has accorded to markets like Russia or China or others — they're usually always lower than democratic markets because of this relatively stronger property rights. In fact, I often joke that the best thing that the British left behind in India is not cricket but the rule of common law, which then entails within itself the laws around property rights. And it is also one of the most inefficient markets from an alpha generation perspective. It presents a very fertile ground, and several studies have been done in the past — some of the data we might see later in the call as well — to harness this alpha potential.
We have, in my assessment or in my knowledge, the most well-resourced team of seasoned investors by number or by caliber, which has demonstrated a very consistent and long track record through stock selection or bottom-up stock picking. We consciously stay away from top-down factor bets or market timing in any form. And what we bring to the trust market via the Ashoka India Equity Trust is a structure that is very well aligned, where the fees are that the management team only earns any fees — the manager earns fees only if the fund outperforms the benchmark. So we get paid only if we add value, and those fees are also paid over three-year measurement periods and in the form of stock or units of the trust. That's a somewhat unique structure, I believe, in the trust market, and something that our investors have greatly appreciated.
We won't go over each and every item, but this is the summary: we have, as I said, a very well-resourced team with a performance-first investment culture, a rigorous approach with a proprietary OpCo-FinCo framework which many of you might be very familiar with, a strong track record, and a best-in-class company structure. So when it comes to investment culture, there are four key pillars. We call it performance-first culture. It's a sports team-like mindset that underlies or is a foundation of the culture, where everyone on the team is driven by a single-minded objective of generating the highest returns for our client portfolios compared to the peer group. So the game here, or the sport here, or the score is kept on returns that you deliver for client portfolios, and nothing motivates us more than to score higher returns for our investors. And it is founded on these four pillars: team, philosophy, process, and portfolio construction.
Just to touch very briefly on each: it's a 50-member strong team, of which 35 are involved in research, India research and decision-making. Most recent addition, where my cursor is, Dasani — many of you might know he was the CIO or co-head of emerging markets at GSAM, someone whom I had hired at GSAM in 2006, nearly 20 years ago, had worked with him for 10 years, and then had recommended him to take over my role, which he did, which Goldman did appoint him. He is also the lead PM on India, and after eight years in that role following my departure, he's finally decided to join us last month, and he's the 50th member of the team, further strengthening what is, in my biased opinion, the best team in the industry anywhere in the world.
Going to the shared philosophy of the team, it's that outsized returns are earned over time by investing in great businesses at attractive valuation. So there's no robotic science here. It's something that every manager says: great business, attractive value. But as I often give the example, just because something is simple doesn't mean it's easy. You know, we all know that to have a healthy body, which is most important to us all, we must eat well, sleep well, exercise, and have a stress-free life. Very simple four things to do, yet the most difficult to do despite being most important to all of us in our lives. Similarly, the consistent application of this approach is what I believe distinguishes ourselves from the peer group.
What we consider now as great business is one that has these attributes: superior returns on incremental capital, scalable, and well-managed both on execution and governance. These are born out of the fundamental value equation here at the bottom of the slide, which is that the value of any business is nothing but the present value of future cash flows. To generate cash flows in the future, return on incremental capital has to be superior to the cost of capital. The more superior they are, the better. Scalability is about the growth, which is the denominator in the denominator of the equation. And when you have potential for cash flows and growth, you need management DNA for execution to deliver on those, and first and foremost, or above all, strong governance DNA so that the fruits of the enterprise are shared with minority shareholders.
Those cash flows are shared in proportion to our minority shareholding. Otherwise, it may be a great business only for the controlling shareholder, not for us all. In such cases, best to avoid those businesses. Our team has done a fantastic job over the years in avoiding governance landmines, and not just in India — across emerging markets, I would say — and that forms an important element of the returns that the portfolio then experiences.
We conduct in India, I would say, during the course of a year, close to 2,000 meetings collectively as a team with various company managements, their peer group listed or unlisted, their suppliers, the distributors, where relevant, you know, consultants, ex-employees, regulators, so on and so forth, in identifying such opportunities. And when we find them, it's important to value them logically and invest only if and as long as there is substantial upside to fair value. We are not of the school of thought that says find a great business, buy it at any price, and hold on forever and you'll make money. Maybe there is some merit to such an approach in generating average or somewhat above-average returns in the portfolios.
But our desire, very much to go back to the performance-first culture, our desire is not to just beat the benchmark but to beat the best-performing peer out there in delivering the returns to our investors, and to that end, valuation discipline is very critical. Having said that, we don't look at P/E multiples or EBITDA multiples and so on, because in our view, in our framework, those are highly distorted and lead to misleading conclusions. What we focus on again is a first-principles-based approach of discounted cash flow, which is adapted or enhanced to align with our philosophy that you saw — again, not the forum to go through details of this — but in this framework we divide any company, what we call OpCo-FinCo framework, trademarked by us, divide the company into two entities.
Let's say a UK company, if you were to evaluate — OpCo-FinCo. OpCo-FinCo will house the plant and machinery and working capital. Revenue and EBITDA would be assigned to OpCo, from which it would be deemed to pay an operating lease cost for use of the factory or plants and working capital financing cost, and after paying taxes, what is left in OpCo is excess return on invested capital related cash flows, because cost of capital has been paid out to FinCo. So two distinct deemed subsidiaries, which are distinct in the way to be valued. For invested capital here, by design, it only earns cost of capital, so it's very simple to value by first principles. It is one-time invested capital. It's a low-multiple business.
So enterprise value is broken up into its two distinct components. What is the combination, and what is the mix of these two, provides a very useful insight. And once you rearrange the terms in this equation, you get the second equation, which is price to excess ROIC cash flow multiple, and that is the multiple which we use for companies when we compare relative valuation. For well over a thousand companies now in India, we would have this framework applied, where we have what is the component mix of value for those companies and what is a price to excess ROIC multiple for those companies. This provides a far superior, far more logical apples-to-apples comparison within a sector as well as across sectors compared to P/E multiples or EBITDA multiples, which are apple-to-oranges or even apple-to-lemons kind of comparisons in many cases.
So just moving on in the interest of time: the beauty about the Indian market — and I have invested in the developed world as well as across emerging markets, combined together several dozen countries — India is one of the few countries where there's a very large investment universe. There are 800-plus, I would say, for the purpose of the trust there are well over a thousand, because we go deeper into the market cap spectrum, there are well over a thousand companies to pick and choose from, and hence that's one of the elements of being very alpha-rich or fertile grounds for investing.
Combine that with the large, well-resourced team we have — well-resourced in terms of number as well as caliber. So these are all tied together. It's not a coincidence or an accident that we have a large team. Recognizing that the nature of the opportunity is such — very large in terms of scope and very high in terms of rewards if you get it right — recognizing that our performance-first culture, the idea is to generate the highest return, we have deployed the resources to that end, to mine, to harness this alpha and bring the best to the portfolio. In the interest of time, we'll keep skipping in terms of portfolio construction.
So, not only has the performance delivered by the team been very strong, peer-group leading in terms of returns — be it total return or the outperformance, obviously they go hand in hand — but the consistency of that return has been unparalleled. Usually it is presumed that high returns would mean high volatility, even in alpha terms. So high outperformance must be associated with very high — sorry, large magnitude of long-term outperformance must be associated with high volatility of that outperformance in the interim time period. Whereas what our clients have hopefully experienced in our case is the largest of the magnitude and unparalleled consistency.
And that is to do with the consistency bit. So I've always said that the magnitude of alpha is a function of our stock selection capability, and the consistency of alpha is due to our balanced portfolio construction approach, where along with maximizing long-term alpha potential, we also consciously seek to minimize the short-term volatility of that alpha, particularly by minimizing factor risks. Because in our view, alpha is all in stock selection, whereas volatility comes from both stock selection as well as factor bets. Factor bets, or top-down macro bets, or thematic bets, they don't add any value in our view over time. There's zero-sum gain, and hence we keep them to a very low level.
We do tolerate some of these factor risks like small and mid-caps. It's very well known everywhere in the world — developed markets like US or UK or emerging markets — small caps are a more inefficient segment of the market. So India to begin with is a more inefficient market; within that, small caps would be even more inefficient. So we do allocate a higher allocation to small caps because higher alpha per unit of capital we can generate. As you can see on the right-hand side table here, portfolio average weight in small cap historically has been 33% compared to 9% of the index.
And if you see the annualized excess alpha, it is about — these are all gross of fees and taxes, and they're more indicative, might not be precise. The actual numbers may not be precise to the decimal, as the software often does take a day-end prices rather than actual transacted price and whatnot. But 2,200 basis points of alpha annualized in small cap compared to 700–70 in mid and 200-plus in large. Even 200-plus in large is very difficult, would put us in the top ranks of a comparable peer group. So nothing to scoff at, because it's a more efficient segment of the market. But in smaller caps and mid-caps, you'll see very high alpha potential.
And this, both as it says here, small caps as well as pre-IPOs. We are very uniquely positioned in the Indian market where we are resourced to evaluate companies before they go for IPO, and we also are, in my assessment, we are the first port of call managers for companies coming to IPO if they wish to do pre-IPO, and then that spills over into anchor allocation or corner-store allocations as well. And over the last eight years, we've done over 50 of these in the trust vehicle. Trust vehicle is a perfect vehicle to do something like this, and that has hugely benefited us from that. And our peer group are just not equipped to do this, and hence not been able to harness this alpha.
We also, besides smaller caps, we also allocate more to the better-governed segments of the market. So certain sectors tend to be less represented in the portfolio, such as real estate, commodities, and even energy, utilities, and government-owned entities, compared to that — other better-governed segments of the market are higher allocation in the portfolio.
With the last couple of slides, I'm going to come to a pause here. So this is the performance over the last — before going to performance, I just want to reiterate that the fixed management fee is zero. Performance fee is only paid in shares if we outperform the market over three-year windows, and there is an annual redemption facility at approximately the NAV.
Now if you see over the last — since 2018 till now, seven-plus years, the portfolio has returned — since the portfolio got invested at the end of July 2018 — 15% GBP return, and this is net of fees, this is NAV, compared to 8.7% benchmark return for 629 basis points. Remember, this is not just net of fees and performance fee and expenses, this is net of taxes. In India there are capital gains taxes, so what is 8.7 for the benchmark would likely be 7% for the ETF. It's not like the typical ETF which is 30, 40, 50, 60 basis points below the benchmark; it'll be 150 to 200 basis points below the benchmark for an ETF because of the taxes.
So the performance relative to ETF, which is the right way to look at it, because everyone's got to pay taxes — benchmark is an artificial construct in that respect. So about 800 basis points of alpha thereabouts, give or take — I haven't seen the actual numbers, give or take 10, 20 basis points — would be the alpha, which is an outlier of alpha generation. And that's part of the reason why the portfolio has traded relatively close to — and the stock price has been relatively close to the NAV, with on average a bit of a premium, which we'll see very shortly.
So since inception, if you look at the NAV, 69% return compared to benchmark cumulative 80, compared to peer group which has ranged between 33 to 62%, all of the peer group being on the other side of the benchmark. And the share price also correspondingly, you'll see, has far outperformed the peer group. This shows the discount or premium on average over the last eight years, we've traded at a half a percent premium compared to sizable discount elsewhere. It's partly to do with the performance, partly also to do with the way the fees are structured and the redemption window that we've offered.
This has also allowed us then to tap the market. We've probably been one of the most prolific issuers of equity on the London Stock Exchange, particularly in the trust market, having grown nearly tenfold. When we launched in 2018, I remember the total proceeds were £46 million at the time in the IPO, somewhat disappointed compared to the £100 million odd target that we had. And today it is — last I saw — was over £460 million, so it has grown tenfold. A lot of it is due to tap issuance, a lot of it is due to appreciation as well, and it has become the most liquid — second largest today and the most liquid compared to the peer group.
So I will pause here. There's a lot of other data on slicing and dicing performance, which predominantly shows that all of the performance has come from the vast majority from stock selection, which is aligned with the investment team's philosophy and portfolio construction approach. Thank you.
I'm glad you used the word expensive and not overvalued. Because a big difference — big difference between the two. Expensive, you know, look, let's look at a British car. Range Rover is more expensive than a Fiat. But I'm sure that people will appreciate why there is a difference — a better engineered, far better engineered vehicle that Range Rover is.
In case of stocks, if we were to talk about — now most people associate a higher multiple with merely growth. Now, growth is not the number one reason in determining multiple. I'm just going to go to a particular slide here. So growth is not the number one reason in our view, and you can look at any sector in the UK.
You will find that a company that is better governed, more often than not, would be trading at a substantial premium — where corporate governance is superior, would be trading at a substantial premium compared to other companies within the same sector where corporate governance may be somewhat weaker, even if this weaker governance company has far higher growth. Because what corporate governance stands for, first and foremost, is that you as a minority shareholder would have fair rights, proportionate rights to cash flows of those companies in future. Weaker governance means that is a question mark, right?
Now think about it for a country as well. I'm not saying every company in India has superior governance than anywhere else. I know some of the stories out there might suggest otherwise; those stories are there everywhere, including in the US. But at a country aggregate level, what I was talking about earlier — India has very — and this is a slide that hasn't changed, I put this slide together probably 18, 19 years ago — at the bottom, what I've highlighted here, it's a very fundamental pillar of the Indian market. India is, even though it's an emerging economy or emerging market, when it comes to the government or the nature of the construct of the government, it's a fairly mature democracy.
Within which what it means is it has an independent central bank, as independent as probably anywhere in the world, election commission, judiciary — probably judiciary, you know, given what's happening in some of the developed world countries like the US, you know, it seems like it can be — not just I used to always say relative to emerging markets, but now I'm tempted to say anywhere in the developed world as well. Which then bestows strong rule of law and strong property rights under, as I was saying, the common law system that we inherited.
So in India, it's not easy for the government to confiscate your property. You can sue the government, and people sue the government all the time in India and win against the government. Even a small farmer sues the government and wins against the government, which often was criticized in case of India that it slows progress. India can't build a highway for 10 years whereas China built the Three Gorges Dam in 5 years, even though it entailed displacing millions of people. I would always argue — I mean, isn't that a plus point in case of India, that even a country that respects its own small farmer's rights might potentially respect a foreign investor's rights? A country which does not respect their own farmer's rights — what confidence do you have in their system protecting a foreign investor's rights?
A lot of these things have played out over the last few years to hurt the returns that investors have earned. And this is what has — I'm surprised we haven't seen more work along these lines. We have actually written a newsletter in 2021. The title of that newsletter is 'The Indian Premium', which goes over all these things in greater detail, and a lot of it is pioneering work from our team members.
You see this top left-hand side graph. It shows the dark blue line, that is the median P/E multiple that more democratic countries have traded at over the last 27 years. And the light blue line is the same for the less democratic or authoritarian countries. There has always been a huge difference. At the turn of the century, in fact, it was a 100% premium that democratic countries traded at. Today, it's if anything narrower.
So emerging markets by weight — if you see, a lot of it, half or maybe more or somewhere around there, is authoritarian countries. So when you just compare against EM average, it's not an apples-to-apples comparison. And if you compare against the US, which I think is in many respects more of a comparable — be it the growth or the governance or the democratic nature — the bottom right-hand side, if you look at, India has always traded at a 1% — just minuscule — in line with the US market. Today it is at an 11% discount.
So I would argue — I'm not saying it's table-pounding or something — but historically it's only traded at wider discounts in times of crisis like the global financial crisis or the COVID pandemic. Relative to its own self, it's trading in line with — again, the last 10, 11 years since the Modi era — at about 20 times.
So first of all, let's look at some facts. I agree that that's a talking point and maybe weighing on recent sentiment, and hence maybe a one or two percent hit to the market. The market's quite smart. If you look at the Indian market, the construct of only 1.4% of India's benchmark is subject to tariff risk. And that, at varying — it's not that that 1.4% is going to go to zero. It may suffer — half of it may suffer. But it's less than a 1% hit potentially. India is not an export-dependent economy, number one. A lot of this export revenue that we own is in software IT services. They are not merchandise goods. We are usually importing mostly when it comes to goods. So that is just a first level of perspective.
Obviously we don't know how it would settle and all, but that's one perspective. But more importantly, there are always going to be concerns when it comes to any market, even UK, US, or any market. I mentioned in my comments that in 2018 we only raised £46 million instead of the targeted £100 million was because just when we were on the IPO, in that two or three-day window, oil price spiked to $88 or $90, and everyone just has this misconception: well, oil prices going up is bad for India.
Maybe that was the case in the '80s, '90s or whatever, when oil as a percentage of GDP was far higher. Today it's immaterial — or I won't say immaterial, but it is not that big of a deal. If I show you — this is since 2007. You can go back since the turn of the century, which is the year 2000, and if you were told at that time all the things that are going to happen that actually happened — starting, we were just coming out of a war with Pakistan, there were terrorist attacks on our parliament in 2001, people forgot about that, train attacks in 2006, Mumbai which is probably people remember in 2008, global financial crisis, oil prices going to 150, massive corruption scandals that came to light during 2010 to 2014, COVID pandemic, Russia's invasion of Ukraine — we've kind of jumped through numerous others because there wasn't space, but all of these are listed here, just too many.
You know, the taper tantrum, Trump getting elected was a big risk, Brexit was considered to shake up the world, fears of Brexit, PIGS, Russia, Ukraine, and all the way. You know, you would not have touched India with a barge pole if you were told about all these things. You would have not touched India with a barge pole. But look at the returns during this time. Since the turn of the century, India has generated an 11.2% annualized dollar return compared to a global world return of 7.3, US, which is a flag bearer in capital markets, 8.5% return, and emerging markets 7.9 — these are all dollar returns.
Now this is history. I'm not saying it's going to repeat going forward as well, similarly. But all I'm saying is all these macro risk factors you have to keep in perspective. Look, here at the bottom right-hand side, India has delivered the highest earnings growth in dollar terms as well at 7.1, which is what has fueled in great part the higher returns, because earnings is the important element of returns.
So the important thing to not underestimate is 1.4 billion people every morning wake up and proceed with their day with the aspiration, with the aim to improve their way of life. Each individual counts for very little, but when you collectively look, the collective of 1.4 billion is such a powerful, such a powerful force that these macroeconomic risk factors of the kind of tariffs, they are not even, I would say, pebbles in front of that bulldozer or that juggernaut.
And believe me, in a few years' time, when we have this slide again that I was showing earlier where there were numerous events that happened, probably this Trump tariff threat would not even make its way on this slide.
