e-fundresearch: "Which macroeconomic factors are currently most important for Indian equities?"
David Gait, Senior Portfolio Manager & Sashi Reddy, Deputy Portfolio Manager, "First State Indian Subcontinent I" (14.09.2011): "Recently, fears over corruption and rising interest rates have weighed on Indian equities, meaning that pockets of the market have certainly become more attractively valued, although the better quality companies have perhaps held up too well."
Wojciech Stanislawski, Fund Manager, "Comgest Growth India" (13.09.2011): "After the S&P downgrade of the US government´s AAA sovereign credit rating, risk aversion heightened, leading to an exodus from emerging markets to - ironically - the downgraded US government paper. In line with this exodus, Foreign institutional investors sold $2.4 bn of Indian equities in August, the highest monthly sale in 2011. The month of August also witnessed the biggest stand-off over corruption between the discredited Indian government and the people. The largest demonstration in independent India, lasting 11 days, ended with the government agreeing to most of the civil society´s demand to set up an independent Anti-Corruption Body. Markets rallied on this victory of the people."
Adrian Lim, Fund Manager, "Aberdeen Global - Indian Equity A2 Acc" (13.09.2011): "Outside of what is happening in Europe and the US there is mixed evidence of a slowdown in domestic growth. One reason is that growth a year ago was exceptional so the year-on-year comparison was always likely to fall. Another is the government’s fiscal profligacy. Delhi has been tempting fate by continuing to spend without introducing structural reforms. That has left the RBI alone in its policy tightening. However the IMF is still forecasting India’s GDP to rise 8.2% this year and 7.8% in 2012 – very respectable rates when compared with most other countries. Lower but higher quality growth is no bad thing."
Richard Chow, Fund Manager, "AllianceBernstein-India Growth Portfolio AX USD" (14.09.2011): “We believe the strong underlying fundamentals in economic activities should continue. We generally expert interest rates to rise, but GDP growth will still be above a respectable 7%. The underlying demand growth potential remains strong as structural infrastructure needs must be met and urbanisation is increasing.”
Ludovic Vauthier, Fund Manager, "Edmond de Rothschild India A" (09.09.2011): "The most important macro factors are the following:
a. Inflation: India needs a lot of capital to develop its infrastructure. Typically, an infrastructure project will be financed through 70/80% by debt and 20/30% equity. Therefore, if the Reserve Bank of India has to increase its interest rate, the economic viability of the project could be at risk.
b. Real interest rate: to see whether or not further interest rate hikes are necessary
c. Liquidity: liquidity in the banking sector, to be sure that access to capital is available
d. Current account deficit (for the Indian Rupee foreign exchange rate)
e. Fiscal deficit."
Mads Kaiser, Fund Manager, "Jyske Invest Indian Equities" (13.09.2011): "Global macro factors are defining the direction of Indian equities at the moment. The debt crisis in Europe and leading indicators rolling over in most of the developed world clearly sets a negative tone to current markets. But that will pass. And internal factors like Indian inflation and economic activity will take centre stage again. India should do well in a scenario with falling commodity prices and stable, low growth in developed economies. Being a large, closed economy, internal factors is normally most important. And India imports nearly 80% of the oil that is consumed in the country – and the government subsidizes retail prices, so falling oil prices will not only help bring down inflation – it will help the Indian government balance its fiscal budget."
Question 2
e-fundresearch: "Which are the most important elements in your investment process?"
David Gait, Senior Portfolio Manager & Sashi Reddy, Deputy Portfolio Manager, "First State Indian Subcontinent I" (14.09.2011): "Our own approach to stock selection is built on company meetings and intensive research to identify reasonably valued, cash-generative companies with strong management at the helm. We avoid companies with poor-quality managements and those overtly influenced by the government. As a result, we have little exposure to real estate and infrastructure-related companies, with Tata Power being an important exception. Although infrastructure is likely to be the single largest driver of the economy over the next decade, we believe this will not translate into equity market returns. When appropriate, we may exploit this theme indirectly by investing in cement and banks."
Wojciech Stanislawski, Fund Manager, "Comgest Growth India" (13.09.2011): "The investment process is illustrated below:
Adrian Lim, Fund Manager, "Aberdeen Global - Indian Equity A2 Acc" (13.09.2011): "Stock selection is what sets us apart. We do our own company research and if a stock fails our screens we won’t own it. Furthermore no company is bought before we meet management. Unlike many fund managers we’re long term in our focus. That means we go back and visit companies again and again. The benefit of this is to isolate only the well-managed companies that have attractive long-term prospects and which represent good value. It’s important for us to focus on price as well as quality – there’s no point paying over the odds however attractive a company might be."
Richard Chow, Fund Manager, "AllianceBernstein-India Growth Portfolio AX USD" (14.09.2011): “We believe that deep research is the key to discovering whether companies are poised to surprise the market with unexpected growth. Therefore our analysts are constantly out in the field scouring the market for insight that will give us an edge in India. The analysts spend a considerable amount of time understanding a company’s business model and industry. They also conduct interviews with senior management, middle management, suppliers, competitors and other industry experts to assess capacity for growth.”
Ludovic Vauthier, Fund Manager, "Edmond de Rothschild India A" (09.09.2011): "In our investment process, we first look at the macro-economic environment in order to decide which sectors seem to offer the best potential. We then begin our stock-picking. We have a list of 120 stocks (which are the most liquid stocks) and look at those which offer the best Visibility/Earnings growth/Price per sector combination. Once this quantitative approach is completed, we start building a model for the selected companies. We call analysts to understand/challenge their views in terms of perspective and then we either organize conference calls with company management or management meetings. We then have enough input to confirm or refute our assumptions and can fix a target price for each selected company. For large caps, we want a 15% upside minimum as for small & mid-caps we expect no less than a 30% upside.
When do well sell a position?
a. When the company has published results below our expectations, with structural challenges
b. When the target price has been reached, if everything is priced to perfection and there is no further upside
However, if the target price has been reached and what is known is priced in but further developments could boost the target price, then we only partially sell the position."
Mads Kaiser, Fund Manager, "Jyske Invest Indian Equities" (13.09.2011): "Picking the right stocks and building well diversified portfolios are the most important elements of our process. We focus on valuation and momentum when we pick stock – because these factors have contributed to excess return in the long run. We believe our investors will be best served with well diversified portfolios of stocks that are cheaper than the overall market but also show better earnings.
Our strategy will not reward investors with spectacular outperformance in a given year. Our aim is long term solid results – consistency is very important for us."
Qestion 3
e-fundresearch: "Which over- and underweight positions are currently implemented in your Indian equity positions?"
David Gait, Senior Portfolio Manager & Sashi Reddy, Deputy Portfolio Manager, "First State Indian Subcontinent I" (14.09.2011): "Overweight sectors: consumer sectors, health care, industrials, telecom services, utilities
Underweight sectors: energy, financials, information technology, materials."
Wojciech Stanislawski, Fund Manager, "Comgest Growth India" (13.09.2011): "Please see attachment (Growth India vs index overweight underweight 1108).
Adrian Lim, Fund Manager, "Aberdeen Global - Indian Equity A2 Acc" (13.09.2011): "As stock pickers, our sector allocations are driven by where we can find quality companies with attractive valuations. This style may lead to significant deviations from the index.
Overweight
• Consumer Staples and Discretionary – we continue to like consumer companies, which have strong brands and effective distribution networks that cater to India’s growing middle class population.
• Information Technology – the sector has several high-quality companies with good management and sustainable business models that are globally competitive. They also have solid balance sheets with strong cash positions.
Underweight
• Energy – our biggest sector underweight is largely due to a lack of exposure to Reliance Industries, which makes up a large part of the MSCI India Index. In light of the cyclical nature of the sector and the inability of companies to pass on higher costs, we prefer more attractive investment opportunities elsewhere.
• Industrials – we are selective in the segment and invest only in well managed companies with resilient business plans."
Richard Chow, Fund Manager, "AllianceBernstein-India Growth Portfolio AX USD" (14.09.2011): “We will continue to focus the portfolio on what we believe to be well-managed companies with strong growth potential. Stocks with the best combination of growth and value should perform best in the current environment. Our portfolio is currently overweight in technology, health care, industrials, telecom and utilities sectors and underweight the financials, materials and energy sectors.”
Ludovic Vauthier, Fund Manager, "Edmond de Rothschild India A" (09.09.2011): "Currently,
We overweight: consumption, utilities, telecom
We underweight: banks, infrastructure, IT, materials, energy."
Mads Kaiser, Fund Manager, "Jyske Invest Indian Equities" (13.09.2011): "We currently have very small sector tilts – given the great uncertainties. On a company level we have largest overweights in tobacco giant ITC, national oil company ONGC, a small private bank Jammu & Kashmir Bank, Sintex, that supplies the construction sector and Cadila Healthcare. Main underweight positions are auto producer Maruti Suzuki, the large brewer United Spirits, iron ore miner Sesa Goa, IT-outsourcing company Wipro and industrial conglomerate Adani Eterprises."
Question 4
e-fundresearch: "Where do you see risks for investments in Indian equities?"
David Gait, Senior Portfolio Manager & Sashi Reddy, Deputy Portfolio Manager, "First State Indian Subcontinent I" (14.09.2011): "In terms of the Indian subcontinent as a whole, we are concerned about the political and economic challenges facing our Sri Lankan companies and recently sold our holdings in John Keels, National Development Bank and Aitken Spence. The Indian subcontinent also has some of the world’s most dangerous borders, with the Indo-China one likely to be an area of potential conflict over the next decade.
We recognise that internal political developments play a major part in setting the social, regulatory and economic background in which companies operate – more so in emerging economies than elsewhere."
Wojciech Stanislawski, Fund Manager, "Comgest Growth India" (13.09.2011): "Infrastructure can be named as one risk for the investment in Indian equities: No city in India is currently 24 hours a day supplied with drinking water and electricity. The average time of turnover for Indian’s harbors is approx. 4 days (Hong Kong: 10h). Only 25% of the highways have two lanes and 90% are not suitable for trucks with loads of 10.2 t and more. But India developed a huge infrastructure investment plan for the next 5 years, mainly for the expansion of electricity supply and road network.
Looking at the portfolio of Comgest Growth India:
When we feel the valuation is too high and/or we have concerns on the fundamentals of the company versus our initial investment thesis, we may sell a stock. We have the discipline of attrition as well, meaning that when we find a new company we want to put in the portfolio, we may choose to sell another if we feel the risk adjusted upside is superior for another stock."
Adrian Lim, Fund Manager, "Aberdeen Global - Indian Equity A2 Acc" (13.09.2011): "While petty corruption is a way of life in India, the country has been paralysed recently by corporate scandals, chief among them being the sale of telecom licences that has led to the resignation of two cabinet ministers. The government now seems to be developing a siege mentality, as a newly empowered middle class demands accountability. It could be missing an opportunity, not only to clean up public life but also to initiate reforms that have remained stuck. Bills on land reform, consumption tax and the opening of the retail sector to foreign direct investment are all pending. But India has thrived in spite of, not because of, its government. That is why, from an investment perspective, we remain unperturbed."
Richard Chow, Fund Manager, "AllianceBernstein-India Growth Portfolio AX USD" (14.09.2011): “In the near term, equity markets are being squeezed by tightening monetary policy, deteriorating global growth and recent corruption scandals. Earnings growth expectations could move down further in the near-term before it stabilizes. These are real and valid concerns, but the new approval processes for infrastructure contracts will be faster and more transparent.”
Ludovic Vauthier, Fund Manager, "Edmond de Rothschild India A" (09.09.2011): "If the Reserve Bank of India aggressively cuts interest rates."
Mads Kaiser, Fund Manager, "Jyske Invest Indian Equities" (13.09.2011): "The debt crisis of Southern Europe (and potentially other places), small but growing signs of protectionism in the west, capital restrictions in east and quantitative easing are currently my biggest concerns. It is very difficult to predict the long term outcome of these. And they could all cause a lot of pain on emerging equity markets.
Attempts to implement political reform in India can hardly be any weaker than is the case at the moment; therefore all activity in this respect is good news. In addition, significantly rising inflation may put pressure on the Indian central bank to raise its interest rate in big steps, which would put a damper on the economic activity. Particularly structural inflation caused by bottlenecks in the Indian economy would put pressure on the equity markets due to structurally higher interest rates and lower earnings margins.
Finally the Indian budget deficit makes the country dependent on regular issues of government bonds. Rising interest rates may force the government to introduce savings and curb growth."
Question 5
e-fundresearch: "Did your fund outperform or underperform vs. benchmark over the past 5 years and which part could be linked to stock selection (Performance Attribution)?"
David Gait, Senior Portfolio Manager & Sashi Reddy, Deputy Portfolio Manager, "First State Indian Subcontinent I" (14.09.2011): "(The First State Indian Subcontinent Fund was launched in November 2006 so does not yet have 5 years performance)
Since launch the First State Indian Subcontinent Fund has returned 101.5% against a benchmark return of 46.6%* and a sector return of 32.2%. Our conservative investment process is purely bottom-up and is likely to add significant value relative to the benchmark index in falling markets."
*Data source: Lipper Hindsight, benchmark is MSCI India Index
Wojciech Stanislawski, Fund Manager, "Comgest Growth India" (13.09.2011): "Pease see attachments:
Comgest Growth India attrib sector FY2010
Comgest Growth India attrib sectorYTD 2011
Comgest Growth India outperformed its index by 3.32% p.a. on average (as of August 31st, 2011)."
Adrian Lim, Fund Manager, "Aberdeen Global - Indian Equity A2 Acc" (13.09.2011): "The Aberdeen Global - Indian Equities Fund has outperformed over the past five years largely due to good stock selection."
Richard Chow, Fund Manager, "AllianceBernstein-India Growth Portfolio AX USD" (14.09.2011): “The ACMBernstein India Growth fund has outperformed its Benchmark (BSE 200 Index) by +3.3% annually over five years (31.7.2011). While stock and sector selection were both positive most attribution came from the stock selection.”
Ludovic Vauthier, Fund Manager, "Edmond de Rothschild India A" (09.09.2011): "From 31/08/2006 to 05/09/2011:
Edmond de Rothschild India: +38.5% vs 34.49% for the MSCI India in EUR. This outperformance is due to both better sector allocation and stock selection."
Mads Kaiser, Fund Manager, "Jyske Invest Indian Equities" (13.09.2011): "The fund has underperformed over the past 5 years – but it is ahead of its benchmark over the last 3 years. In other words the underperformance came in 2007, when Indian equity markets boomed, and we had a more cautious portfolio. Traditionally 80-90% of our excess return comes from stock selection."
All performance data per 29.07.2011: