IOPP: Investing In India With A Hedge Fund Manager (NYSEARCA:IOPP)

Introduction

Simplify has been on a tear with its ETF lineup, releasing several funds that have captured the attention of investors. One that has gone under the radar, not for any particular reason as far as I can tell, is the Simplify Tara India Opportunities ETF (NYSEARCA:IOPP).

This ETF is actively managed by Simplify’s sub-advisor, System Two Advisors (sometimes System 2 Advisors) and aims to outperform the MSCI India index.

It was launched on March 4th, 2024, and has little track record so far, but has been keeping pace with the index, even if it is more volatile.

System Two Advisors

The most important factor for actively managed funds is the manager. I had to do a little digging on System Two Advisors because their website is incredibly barebones. It has one singular page with contact info and a very brief “about us” section filled mostly with regulatory talk.

Founded in 2011 by Anupam Ghose and Robert Jones, System Two Advisors, LP is a Delaware limited partnership that is registered as an investment adviser with the Securities and Exchange Commission. It is also registered as a Commodity Pool Operator with the National Futures Association. System Two serves as the investment adviser to certain managed account clients and private investment funds.

So, who are these mysterious advisors?

From the firm’s Form ADV, which is required by the SEC, we can see several interesting facts about them.

• They directly manage $522,000,000 (IOPP is not included in this since they are sub-advisors) across two hedge funds
  • $48M is discretionarily controlled and is held in investment companies directly controlled by Systems Two Advisors
  • $474M is in non-discretionary vehicles, like pooled investments
• Their two funds are based in India and Mauritius, but operate on the same premise: invest in India and beat the index
• They charge performance fees for their private clients, which is something unique to hedge funds and private investment funds targeting “sophisticated” investors

Their private AUM is on a tear and has been since 2020.

When discussing their investment philosophy, Systems Two Advisors highlights their unique returns forecasting approach and depth of experience across fund managers.

System Two Advisors is an established asset manager with an innovative approach to equity returns forecasting. This approach is based on research in decision sciences and information theory. We combine the best aspects of both fundamental and quantitative approaches to security analysis. System Two uses disaggregated judgement to reduce cognitive biases and assure completeness, consistency, and comparability in our fundamental process. We use forecast combinations to leverage the “wisdom of crowds” effect, thereby reducing errors and increasing the aggregate information in our quantitative process. Our corporate philosophy is to implement organizational strategies that are used by the most successful firms in both investment management and other industries (e.g. well-defined mission, results-only work environment, flat organization, decentralized decision making, fair pricing, smart people with diverse skills, etc.). We have an experienced team with a history of successful active investing.

Because hedge fund data is largely opaque, I was unable to find their hedge fund performance. That data would give us a much better picture of how we could expect IOPP to perform, since it is essentially an ETF advised as a long-only hedge fund.

IOPP vs INDA (the benchmark)

What sets IOPP apart from its benchmark MSCI fund is the active management component. So what is different about this fund?

The differences are very stark, with the top 10 holdings in each fund giving a preview on just how different they are.

Here is the top ten for the iShares MSCI India ETF (INDA), which directly follows the MSCI India index.

It’s important to note a few things here:

• Reliance is its largest holding, at 8.49%
• There are two holdings above a 5% allocation
• It holds 143 stocks, with its lowest allocation being to AU Bank at 0.09%
• INDA is currency hedged with FX swaps on the Rupee
• It carries an ER of 0.65%

Compare this to IOPP’s top ten.

Immediately, there are some stark contrasts that show just how active of an approach Systems Two Advisors is taking with IOPP.

• Reliance is not held by the fund at all, excluding India’s largest company by market cap
• Its largest allocation is to ICICI Bank at 7.36%
• IOPP has 28 holdings total with its lowest allocation to Campus Activewear at 0.88%
• IOPP is not currency hedged
• It carries an ER of 0.70%
  • Note: There is a 0.30% fee waiver for the first year. This ER will increase to 1% on 3/4/25

IOPP is heavier the consumer discretionary sector, while being very underweight energy due to its exclusion of Reliance from its holdings.

Why India?

Systems Two Advisors has a fairly straightforward pitch for the fund:

• India is one of the World’s fastest growing major economies
• IOPP is focused on the core driver of the Indian growth story: the growth of the middle-class consumer
• It is one of the only actively managed India-focused ETFs
• Invests in a concentrated portfolio of high-conviction ideas

Truth be told, India has been on a tear against its peers in the emerging economy and against developing economies.

Strategy & Philosophy

Simplify presents another side of the argument as well, from IOPP’s fact sheet.

• India is one of the world’s fastest growing major economies, with GDP growth forecasted to be well over 6% over the next 5 years.
• A primary driver of growth is India’s favorable demographics, with 42% of the population under the age of 24 and 79% under the age of 50.
• Personal income in urban areas is forecasted to grow at 11% CAGR over the next 5 years, driving discretionary spending.

Following this, Simplify makes clear why massive names like Reliance Industries were excluded from the fund.

Indexes are dominated by large, globally-oriented firms with return drivers not optimally aligned with the key drivers of Indian economic growth.

Companies like Reliance suffer from being too big, which can stop much of their revenue from being reliant on India proper. This means that if we are going to invest in India’s demographic promise, names like Reliance Industries need to be removed to make room for names more geared toward domestic sales.

Focusing on their security selection process, Simplify provides us with a basic overview.

• Focuses on bottom-up research, evaluating ideas based on business moat, growth drivers, management quality and future growth potential.
• Deep dive analysis by 70 on-the-ground personnel across four offices in India.
• Process results in a high-conviction, concentrated portfolio of 25-40 positions with high active share.

The “25-40 positions” is interesting, because only 27 stocks are currently in the fund. This means that the managers are still waiting to deploy their rather large cash allocation (5.87%) and are waiting for the right opportunity.

Expect the underlying holdings to change further in the coming months as that cash is deployed.

Risks

There are two major risks to consider when investing in IOPP.

Concentration Risk: Holding 28 positions instead of 143 may lead to underperformance as it may exclude high-returning stocks.

Manager Risk: Systems Two Advisors may not pick the best stocks to own and hindsight may show that a different strategy would perform better. Because of the manager’s opaque history and proprietary selection model, investors cannot be sure that the manager has made the right moves in the fund. This could lead to underperformance of a similarly sized fund investing at market-cap weights.

Conclusion

The Simplify Tara India Opportunities ETF (IOPP) is a new fund on the scene and one of very few actively managed India funds. It is sub-advised by Systems Two Advisors, who have experience running hedge funds in India for over ten years.

IOPP is essentially a long-only hedge fund wrapped up in an ETF shell. This is a great opportunity for those who want concentrated exposure to Indian securities without buying the index and holding stocks that have little actual Indian exposure or are subject to market-cap weightings that may lead to underperformance.

For now, I am issuing IOPP a “buy” rating as I believe it is positioned to outperform the index based on the experience of the fund managers and the security selection process. I believe this will lead to outperformance of the index, but time will tell.

Thanks for reading.