Gregg Wolper, a Senior Fund Analyst with Morningstar, recently drilled down into some interesting moves by U.S. equity fund managers. The funds mentioned in this article are not available to UK investors, but the expertise and insight behind the fund remains of interest to a UK investor audience.
Although victory in cricket's World Cup recently brought widespread joy to India, investors in that country's stock market have not been in a festive mood this year. In contrast to most emerging markets, which have posted solid gains in 2011, the MSCI India Index has fallen 4.3% through April 22. Of the 21 emerging markets tracked by MSCI, only Peru and Egypt have fared worse.
Fears that rising oil prices will hurt India particularly hard are one reason for this decline. With a vast population spending much of their meagre income on food, sharp increases in food prices create further worries. In addition, the country's poor infrastructure is an ongoing concern.
Many fund managers, though, remain attracted to India. That's not surprising, given that the country still has a rapid growth rate and is home to global leaders in fields such as outsourcing and steel. What's attention-grabbing, though, is that a small number of managers have made major commitments there. In certain cases, these managers run U.S.-focused funds whose peers, by and large, invest little, if any at all, in any emerging markets, much less hold a double-digit stake in India alone.
Although these are isolated cases, they provide a helpful counterpoint to the trends. These examples show that not all investors are as worried about Indian companies as the local market's decline might imply. The three funds below also can reassure investors who think that nearly every mutual fund manager has abandoned individual decision-making in favour of cautious index-hugging.
Janus Contrarian
Even though this fund is primarily a U.S. equity offering, manager David Decker doesn't hesitate to look overseas. That's not unusual: Plenty of U.S. equity funds own foreign companies, and some of those stakes claim more than 20% of assets.
Typically, however, such positions consist of well-known names in Western Europe or in Asia's more developed markets, or perhaps a resource company in Australia. By contrast, half of Janus Contrarian's 38% foreign stake comes from emerging markets, and almost all of that emerging-markets position--16% of assets--lies in India. For comparison, the typical U.S.-focused large-blend fund has no exposure to India, and the average international large-blend stake is just 1.1%.
Given the Indian market's travails in 2011, it's not surprising that Janus Contrarian sits in the 97th percentile of the large-blend category for the year to date. But it's unlikely Decker will flee: He has owned a hefty stake in India for many years. It's not a market call. He simply finds many companies that fit his eclectic standards there. Steel companies are particular favourites; several are featured in the most recent portfolio, including JSW Steel at 3.6% of assets. But he also says that the country's increasing demand for consumer goods and electric power appeals to him.
Wasatch Ultra Growth
Wasatch just announced it is coming out with Wasatch Emerging India, a small-cap growth fund, and that one of its two managers is Ajay Krishnan. He's an appropriate choice. Krishnan's main fund, Ultra Growth, had nearly 12% of its assets in India at year-end, even though Ultra Growth, like Janus Contrarian, focuses primarily on the United States. Ultra Growth's India position is larger than those of Wasatch's broad international-equity funds, Wasatch International Growth and Wasatch International Opportunities.
Krishnan, whose strategy relies on finding rapidly growing companies, says it is easier to find firms with a 20% growth rate overseas than in the United States. As for India in particular, he says he likes the breadth of that market, saying it isn't driven mainly by resources as are some emerging markets. So he owns Indian stocks in a variety of sectors. But he does favour financials. Krishnan says the relatively strict regulatory structure for banks in India provides a level of confidence, and he likes their high growth rates. The fund has a number of banks and other financials from India in its most recent portfolio, with HDFC a favorite.
Virtus Foreign Opportunities
Among pure global funds that can invest wherever they want, there might be no more committed India fan than Rajiv Jain of Virtus Foreign Opportunities. This fund's near-17% stake in India at year-end was roughly 6 times the average for global small/mid-growth funds. This interest is nothing new. The fund has been heavy in India for a long time, though the stake has grown in recent years.
Like Krishnan, Jain finds plenty of opportunities in the financials sector; he too praises the level of regulation in that country, saying it helped keep Indian banks from the travails of so many of their counterparts elsewhere during the 2007-09 financial meltdown. He also likes consumer plays, such as dominant tobacco firm ITC and Nestle India. But Jain has larger goals in mind as well. For reasons of overall portfolio risk control, he wants companies in the fund whose fortunes won't all be dependent on similar macro factors. Therefore, he looks for what he calls "uncorrelated earnings stories." In his view, India offers an unusual amount of such firms.
Jain's enthusiasm for Indian stocks contrasts sharply with his opinion of China's market. Virtus Foreign Opportunities' most recent portfolio had less than 1% of assets in China, which is typical for this fund. (The category average is about 3% in both China and India.) Jain says many of the best Chinese companies aren't publicly traded, and he fears government interference in those that are.
Jain gets plenty of questions from clients and others about his attraction to Indian stocks. A few years ago he and colleagues wrote a 27-page response, which explained why he found so many Indian companies attractive. He made clear that he was not making a bet on India as a whole, noting that GDP growth does not automatically translate into rising stock prices and pointing out that many Indian companies held little appeal.
