Indian large caps take hit
While Indian funds have lagged behind their benchmark over the past year thanks to a focus on large caps and a build-up in the small-mid cap space, now is as good as any time to invest in the country, according to Fiducian.
According to FE Analytics data, Fiducian’s India fund topped the charts in terms of cumulative returns over the past five years.
Apart from its annualised return to 31 August 2017 at 11.32 per cent compared to its benchmark, BSE100, at 13.5 per cent, the data found Fiducian had outperformed its benchmark over three, five, and 10 years.
The fund returned 18.72 per cent for the three years to 31 August 2017, 25.27 per cent for five years, and 9.08 for 10 years.
Fidelity’s India fund performed similarly to its MSCI India benchmark with its one year to 31 August 2017 return underperforming the benchmark at 10.76 per cent compared to 13.01 per cent. It returned 15.79 per cent for the three years to 31 August 2017, 19.98 per cent for five years, and 5.62 per cent for 10 years – all above its benchmark.
Recently turned one-year-old, India Avenue Investment Management Equity fund's one-year performance of 11.83 per cent at 6 September 2017, beat its MSCI India performance at 9.92 per cent.
Fiducian and Fidelity both cited their focus on large caps as the reason for their funds’ underperformance as large caps had struggled in recent times.
Fiducian investment manager, Conrad Burge, said: “We have the view that the mid and small-cap sector is going to be very dynamic because it is going to benefit from strong earnings growth if we continue to see a strongly performing Indian economy”.
Burge said since Narendra Modi became prime minister in 2014 and made economic reforms, the country had been performing well.
“India has certainly done well in the last few years under his leadership, and importantly the currency, the Rupee, has stabilised and this helps foreign investors seeking good returns. In the past, Indian investment had been undermined by a falling Rupee,” Burge said.
Burge noted sectors with strong growth were industrials, consumer discretionary, healthcare, and utilities.
“Now is as good as time as any to invest in India, we can’t go back in time, and the last few years have been good for India and I think the future is very bright… The market had a good run up and we think given the strong earnings prospect it’s got plenty of opportunities in coming years as well,” he said.
On the fund’s underperformance in the last year, Burge said it was due to underperformance by their large cap focused manager.
“Large caps have struggled a little bit and outperformance by other managers has been marginal whereas prior to that they were really running well, particularly the managers focused on small and mid-cap sectors,” he said.
“They’ve had a good run, but we expect those sectors to come back strongly so we expect them to do well and for our fund as well. There is no doubt there is volatility particularly in those sectors and we can’t be expected to outperform all the time, but the long run performance demonstrates that ability to do well over the long-term.”
Fidelity’s investment director, Medha Samant agreed and said there had been a “sort of euphoria over leadership changes and a lot of outperformance by smaller low quality names”.
“Those names have gone up sharply and our focus is on large cap – it’s about large cap investing, sticking to quality companies, and we have remained true to style over that period. When there are periods of extreme euphoria and a run up in low quality smaller names then there would be a bit of a lag impact,” she said.
“The whole reason is a bubble build-up in the small mid-cap space, and one doesn’t need to react to this because you have to stay true to style. At the end of the day what we are looking at is really to identify companies with strong balance sheets, high quality growth names, higher returns on equity, and lower debt.”
Samant noted that investors should not be out of India completely.
“If you’re there you have got to stay put as there is a lot of change and transformation happening for the better. You have to take a very long-term view and from a bottom up perspective the companies we think are of high quality have a good amount of corporate governance and good management quality,” she said.
India Avenue managing director, Mugunthan Siva, said while he would never advise anyone to invest all their funds into India, the country was very attractive for a long-term investor.
“We always position India as part of a portfolio… For investors building a portfolio, depending on where the investor is in the rest of the portfolio, something like three to five per cent would make sense for growth investor,” he said.
“India is in a position to have strong growth over the next two decades, so if you’re a long-term investor with a five year plus outlook then India looks very attractive over that timeframe.”
Siva noted the common myths related to Indian investments were whether there was good governance, volatility, and high corruption levels, and said these aspects kept investors from reading about India but not investing.
“The important thing is that every country suffers from varied levels of corruption, like every other country has had a past where corruption reared its head in a few articles, companies are now exercising far better principals of governance,” Siva said.
“Globally, investors are trying to find the best companies in India, not only from an investment perspective but also those that are transparent and are exercising good principals and corporate structure. What’s happening now, across a lot of emerging markets is an understanding that global investors aren’t going to invest in their stock unless companies have a good structure in place.”
Noting the fund had its largest weightings towards financials (24 per cent), Siva noted that the Indian financial sector was going through better principals not only in governance but also from a social perspective.
“For example, there is a big push from one of the bigger employers in India to have more women in the workforce and a greater component of women on boards as directors,” he said.
“These companies are also spending their CSR [corporate social responsibility] budget towards either on education in rural India, or improving the usage of bank accounts, and increasing the amount of digital usage.
“So, the banks are behind a lot of these thematics which will create a greater financial inclusion across India rather than focusing on only the wealthy and the rich.”
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