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A la Modi: the India managers to back in a boom

Citywire Discovery reveals the best Indian equity managers for the good times - and the bad

The Bharatiya Janata Party is in full swing. Narendra Modi (pictured) led it to victory in India’s election last month, winning the largest majority for any government in the country for 30 years.

The market has welcomed his triumph, with the MSCI India index up by 18% so far this year in sterling terms – far outstripping the 3% posted by emerging markets in general.

Investor confidence is premised not only on the scale of the landslide, which means Modi won’t have to form a coalition, but on expectations of pro-business reform. The incoming prime minister has promised reliable electricity and water across the country, implying substantial spending on infrastructure and development, while reducing bureaucracy and simplifying the tax system are also believed to be priorities.

If that all comes to pass, Indian equities should continue to rally. So who are the best bull-market managers in the sector?

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Indian stocks recorded their strongest recent run in 2012, gaining 19% that year in sterling terms while emerging markets more widely rose by 10%.

That year, data from Citywire Discovery reveal that two managers topped the charts on a risk-adjusted basis: Citywire AA-rated Prashant Khemka (pictured) at Goldman Sachs and HSBC’s Sanjiv Duggal.

Khemka took first place for the year with an impressive risk-adjusted score of 1.5, far ahead of the peer group average of 0.15. Khemka’s growth credentials are also emphatic: his portfolio has a 54.3% weighting to small and mid-caps, which comprise just 18.4% of its MSCI India index.

Somewhat inevitably, 2012 was followed by 2013, a much less lucky year for such managers as the market dropped by 7% in sterling terms. Duggal slipped to the very bottom of the pile, although Khemka did remain above average.

Rather, last year’s star turns in the bear phase came from Citywire AAA-rated David Gait and Pictet’s Prashant Kothari. Reflecting the more difficult environment, though, neither achieved a risk-adjusted score above 1: Gait came close with 0.99 and Kothari posted 0.72, while the average for the peer group was negative at -0.2 signifying their failure to outperform the benchmark.

Gait and Kothari also kept in positive territory with markedly different approaches. Gait has significant underweights in financials and technology, while Kothari is overweight them through his concentrated portfolio of just 26 companies (Gait owns 41). Gait’s principal active allocations are instead to consumer staples and industrials.

Interestingly, although neither achieved truly exceptional results in 2012’s rally, they at least remained in the middle of the pack. So while those convinced that India will sustain its boom may wish to back Khemka’s small-cap portfolio, those less certain would be better advised to stick with Gait, confident in downside protection and respectable upside participation.

The analysis comes from Citywire Discovery, a new desktop system that allows fund buyers and fund groups to access track records of over 9,000 managers tracked by Citywire. It provides unique insights into peer group analysis, performance comparisons and competitor analysis. For more details contact support@citywireinsight.com

This analysis is based solely on the GBP share classes in the managers’ funds.

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David Gait, First State

Citywire AAA-rated David Gait is a mere speck in this sector by fund size, a factor of his £195 million First State Indian Subcontinent fund having soft-closed all the way back in 1 January 2012. Saving himself from having to allocate surplus cash has clearly benefitted performance.

Gait is committed to what he terms sustainable investment, which he stresses is not simply the same as green or ethical investing. Rather, he characterises it as a risk-control technique that limits his exposure to companies likely to incur wrath of one sort or another.

For instance, one of his largest holdings is Dr Reddy’s Laboratories. This pharma firm paid tax at a rate of 24% in 2012, considerably higher than its peer group; for comparison, local rival Sun Pharma paid just 4%. Gait preferred to back the former on the basis that it was not exposing itself to future liabilities.

Three-year total return: 11.8%

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Hugh Young, Aberdeen

Running a staggering 15 times more money in India is Aberdeen’s Hugh Young, the Citywire + rated lead manager of the group’s £2.9 billion Indian Equity fund. The fund’s performance has not been quite as stellar as Gait’s, but it is still above average on a risk-adjusted basis over both five and three-year timeframes.

Young has long been a fan of India: indeed, the largest holding in his £4.7 billion pan-Asia fund is actually his Indian Equity fund.

The manager has nevertheless recently expressed some concerns about valuations in India amid the electoral ‘enthusiasm’, particularly in the technology and consumer sectors to which he has substantial weightings. Young therefore warned of the potential for ‘some market wobbles ahead’, yet maintained that for the longer term ‘a BJP majority is just the shot in the arm India’s economy needs’.

Three-year total return: -3.4%

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Stephen Dover, Franklin Templeton

Stephen Dover co-manages the £775 million Franklin India fund with Sukumar Rajah, who heads Franklin Templeton’s Chennai-based Indian equity team of 14.

By style they are bottom-up stock pickers. While they do incorporate broader economic considerations into their company analysis, they essentially seek businesses that can provide long-term growth independent of the economic cycle, which steers them towards a quality bias and management teams that protect shareholders’ interests.

One consequence of this is that the fund has tended to outperform when the market is struggling but lag in strong bull rallies. For instance, when the index soared by 80% in 2009, the fund recorded a more modest 63% gain. But in 2011’s crash, when the market dropped 37%, the Franklin Templeton fund lost only 31%.

At the moment the managers are sticking with quality; their portfolio has an average price-to-earnings ratio of 19 and is overweight in financial and consumer discretionary names.

Three-year total return: -11.7%

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Avinash Vazirani, Jupiter

Avinash Vazirani is a 15-year veteran of Indian equities, who invests with a slight value bias. A high-conviction and low-turnover manager, he claims to be happy to build up large positions and run with them for a long time, so long as their growth potential has yet to be priced in.

At the moment Vazirani is more enthused by corporate fundamentals in India than macroeconomics and politics, although he recognises the beneficial effect the latter have had on the former.

‘Companies have weathered the downturn and absorbed the impact of higher interest rates by cutting costs,’ he explained. ‘Third quarter company results were the best in eight quarters, with earnings growth of over 20% according to research by IIFL Institutional Equities.’

Vazirani is currently underweight financials, favouring the consumer goods and technology sectors.

Three-year total return: -25.2%

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Related Fund Managers

Prashant Khemka
Prashant Khemka
2/9 in Equity - India (Performance over 3 years) Average Total Return: 50.11%
Sanjiv Duggal
Sanjiv Duggal
7/9 in Equity - India (Performance over 3 years) Average Total Return: 19.77%
David Gait
David Gait
1/9 in Equity - India (Performance over 3 years) Average Total Return: 59.23%
Prashant Kothari
Prashant Kothari
14/18 in Equity - India (Performance over 1 year) Average Total Return: 43.87%
Hugh Young
Hugh Young
5/9 in Equity - India (Performance over 3 years) Average Total Return: 33.88%
Stephen Dover
Stephen Dover
6/9 in Equity - India (Performance over 3 years) Average Total Return: 27.76%
Avinash Vazirani
Avinash Vazirani
8/9 in Equity - India (Performance over 3 years) Average Total Return: 16.52%
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