GO
Loading...

An Indian Affair

"A Fund Affair" is a brand new column that focuses on mutual funds available in Asia. Each week, we will highlight one fund we think is interesting -- whether because it's invested in a hot market, has a niche appeal or simply has been in the news of late.

Our inaugural column features the Aberdeen Asset Management's India Opportunities Fund. Why this fund? A hot topic of debate of late has been the outsourcing of business processes to India. India's benefited from these many contracts. So we decided to explore what India and its economy has to offer the investor and how well Indian companies have performed of late.

There is much value to be found in India, especially if one is willing to invest for the long run, which is very much Aberdeen's philosophy. India is on the cutting edge of the information technology sector, setting the standards for business process outsourcing and even entering the major league of mature industries like Tata Steel's purchase of the United Kingdom's Corus.

Economic growth over the past four years has averaged over 8% annually and in that same period, the stock market has risen more than fourfold. In 2006 alone, the benchmark Bombay Sensitive Index tacked on a whopping 46%.

India's economic outlook looks pretty good as well. According to the figures from the Economist Intelligence Unit, real GDP growth (on an expenditure basis) is forecast at 8.7% in fiscal year 2006/07.

But India, like any other emerging market, is subject to volatility and there are reasons to be cautious.

Mah Ching Cheng, Research Manager at fundsupermart.com, points out that inflation in India is reaching a two-year high. This means the government may implement a hike in interest rates to curb inflationary pressures. Typically, this sort of monetary policy does not sit well with public investors. She feels that at this point of time, India is not an attractively priced market.

Vasu Menon, Chief Editor of finatiq.com also thinks that valuations are looking expensive and that given the market's good run in the past few years, the risk-reward ratio is not very attractive.

However, though growth is expected to slow this year, economists still expect the Indian economy to expand by 7% to 8% annually over the next five years. Menon says India is still a good long-term story on the back of a strong economy and a stable polity.

The Fund

Aberdeen Asset Management agrees that investing in India should be for the long haul. Aberdeen's India Opportunities Fund is worth S$514.9 million and its investment strategy is similar to the one it applies to all its funds -- to look for and invest in quality companies at a reasonable price.

Aberdeen's India Opportunities Fund

Fund Size S$514.9 million
Management Fee 1.5% per annum
Front End Load 5.0%
Minimum Investment S$1,000/US$5,000

What does this equate to? Aberdeen defines quality companies as those with an honest, competent management team, an executable business plan, a healthy balance sheet, and a transparent and comfortable history of good corporate governance. An example of such a company: Infosys Technologies -- one of the leading companies specializing in outsourcing business processes.

When it comes to investing in India, Aberdeen's Adrian Lim, Investment Manager (Asia Equities) says their strategy is to "buy and hold," and not just follow the latest hot stock. Once Aberdeen decides to invest in a particular stock, they become shareholders for the long term.

The fund's top ten holdings include HDFC, Satyam Computer, ICICI Bank, Infosys Technologies and Hero Honda.

Aberdeen Global - India Opp end Jan 07

Sector
Consumer discretionary 8.4
Consumer staples 3.9
Energy 9.9
Financials 21.3
Healthcare 10.8
Industrials 6.0
Information technology 23.2
Materials 7.8
Utilities 8.0
Cash 0.7

Sector-wise, Aberdeen's top weighting is in the information technology sector, followed by financials, healthcare and energy.

The client base that Aberdeen wants to attract is one that subscribes to their long-term view and careful approach. Potential investors must be willing to ride out the inevitable rough spots in order to enjoy what could be very rich returns.

Over a three-year horizon, the fund has underperformed the MSCI India Index. But Lim says that is immaterial as Aberdeen looks at returns based on absolute performance and comparisons to benchmarks do not matter to them.

The Affair

In black and white, Aberdeen's India fund has not been doing well in comparison to other India funds. Aberdeen's performance pales in comparison to Lion Capital India and HSBC Indian Growth, which have returns of 11.9% and 9.1% respectively for the past year based on an offer-to-bid basis as of end February 2007. The Aberdeen Indian Opportunities Fund returned a negative 0.7% for that same period.

Fundsupermart.com's Mah says that Aberdeen Asset Management funds go through a more value-based approach in stock selection. This means that Aberdeen tends to pick stocks with not only good fundamentals, but also companies that are priced at more attractive levels. Given this, when growth stocks do better than value stocks, the fund will have a tendency to underperform its peers.

Mah feels investors with a preference for greater levels of stability during volatile market conditions may be attracted to this fund. Typically value-oriented stocks tend to be resilient to market pitfalls and tend to fall less in comparison to growth-oriented funds.

Growth-oriented funds are more sensitive to changes in earnings growth forecasts. Thus, they tend to be more volatile when growth markets such as India undergo a correction. A good example Mah uses is the global selloff that occurred the week of February 23 to March 2 just a month ago. While the SENSEX index, the benchmark for Indian blue chips, fell by 6%, Aberdeen India Opportunities fund fell by just 4%. In this instance, the resiliency shows through.

The Fund's Performance

Period
6 Months
1 Year
2 Year
3 Year
Bid-to-Bid Returns 10.16% 6.63% 25.1% 24.05%
SGD performance figures (as of March 22, 2007)Courtesy of fundsupermart.com

The performance figures in the table above are calculated using bid-to-bid prices, with any income or dividends reinvested. Performance figures of over one year are annualized. For example, a 33.1% gain in three years works out to a 10% gain per year when annualized.


Please send your questions and comments to us at fundaffair@cnbc.com. We will answer as many of your emails as possible on "CNBC's Cash Flow" airing on Tuesday, March 27, 10 a.m. to 12 noon Hong Kong/Singapore time.

Symbol
Price
 
Change
%Change
HSBA
---
ICICIBANK
---
HDFCBANK
---