This outperformance is not due to some sudden surge in economic growth. Annual GDP rises of above 7 per cent for 2014 and 2015 may be well in advance of anything developed nations can muster, but markets rarely rise in sync with growth rates. And as an emerging nation, 7 per cent growth is far from unprecedented for India.
The reason these funds have doubled investors’ money since 2014 is because of the arrival of Narendra Modi, the prime minister elected in September 2013. Mr Modi’s reform commitments raised hopes that the country would adopt a more business-friendly attitude. Big promises were made: bureaucracy would be slashed, inward investment would increase and jobs would follow.
Three years later, and the overall record is mixed. India’s economy is forecast to grow at 7.1 per cent for the 12 months to April 2017, slightly down on the 7.6 per cent recorded for the previous financial year. Inflation stabilised below the 6 per cent mark for most of last year, allowing the country’s central bank to cut interest rates twice, to 6.25 per cent. But there was also disillusionment with the pace of Mr Modi’s reform programme – until, that is, two pieces of news which herald a new era for the country’s economy.
The first move was long awaited: in August, India’s parliament voted to replace its knot of state and local taxes with a single levy for goods and services. The second was just the opposite: in a bid to stamp out the country’s black market, the government suddenly announced last November it was to ban 500 and 1,000 rupee notes.
It is hard to overestimate the significance of this move: the notes account for some 86 per cent of the money in circulation in India. As of the end of 2016, they can no longer be used. It is a gamble from Mr Modi, and it will be some time before the results become clear. But like the taxation overhaul, it does signal a determination to make life much easier for modern businesses.
The best of the best
If this goal is achieved, then the returns achieved by the best India funds over the past five years may not look so abnormal. As Table 1 indicates, all of the top performers have produced returns in excess of 100 per cent over the past five years, with most achieving this milestone within three.
Funds and trusts have been assessed over a five-year period because most have not been in existence for the usual 10-year timeframe. The top performer is the £282m Stewart Investors Indian Subcontinent fund, run by David Gait, which has returned £2,625 on an initial £1,000.
Notably, the portfolio is the only one listed to have avoided a loss in 2013, meaning it has been able to outperform the MSCI India index on both the upside and the downside in recent years. The fund, which launched in 2007, shed 20 per cent the following year during the financial crisis, but the index slumped 37 per cent over the same period. Advisers who have not yet invested have missed out – the product soft-closed to new investment in 2011.
The second-best performer is the Goldman Sachs India Equity fund, which has returned £2,603 on an initial £1,000 investment over five years. Its compound annual growth rate of 21 per cent comes despite a loss of 5 per cent in 2013; a year in which India funds shed money en masse.
The Goldman fund is $1.7bn (£1.4bn) in size – far bigger than the typical portfolio in the region. But the fund’s sterling share class has just £19m in assets, indicating that this particular product has limited interest from UK-based investors in the country.
Specialisation
Portfolios from better-known providers, such as Stewart Investors (part of First State) and Jupiter, do have more significant UK asset pools of £282m and £620m, respectively.
But Indian equity funds remain a niche asset class, with most investors preferring to tap the country via broader emerging market or Asia-Pacific equity products.
This approach has pluses and minuses. In favour is the diversification argument, and it is perhaps for this reason that specialised single-country equity funds have become less popular in recent years. Broader emerging market funds sit at the riskier end of the investment scale, and India funds are one step further along, meaning they should only be considered for use in the most aggressive investment portfolios.
On the other hand, holding emerging markets funds typically means sizeable weightings to China, Russia, Brazil, or all three. These markets, which with India form the Bric nations, have all endured significant volatility in recent years, and could represent an uncomfortable exposure for those looking to access the India growth story.
Another way of accessing India is via investment trusts, although here the choice is more limited still.
Just three trusts focus their investments on the country, with the Ocean Dial India Capital Growth trust being the best performer over five years. The trust currently trades on a hefty discount to net asset value of 18 per cent, indicating a significant lack of demand despite the strong returns.
The road ahead
Investors who do back India typically find themselves exposed to three sectors that dominate the MSCI India: consumer staples and discretionary goods (23 per cent), financials (21 per cent) and information technology (17 per cent).
When it comes to financials, many managers tend to take things even further and overweight the sector. And in many ways, banks are a microcosm of the balancing act in which the country finds itself following Mr Modi’s demonetization.
The question is whether the longer-term benefit of bringing more people (and their wealth) into the official banking sector can offset the damage that demonetization looks set to do to economic growth in the short-term. If this does prove to be the case, Mr Modi’s reform plans may translate into another round of returns for investors.
India Funds: five questions to ask
1) Am I comparing the full range of funds available?
India funds have no dedicated Investment Association sector: they are littered across broader categories, particularly the Global Emerging Markets grouping. The Association of Investment Companies, on the other hand, does host a dedicated India sector.
2) In which sectors do India funds typically invest?
Financials and consumer goods make up around half of the average India fund’s portfolio, but each fund should be scrutinised carefully when it comes to sector allocations.
3) How much risk is involved?
Dedicated India funds will typically carry more risk than most other asset classes. Share prices in the country can be volatile, and although returns have been strong, these products are only for the most aggressive investors.
4) What size of stock do they invest in?
Single-country funds often invest in smaller companies in a bid to beat their benchmarks. This adds another layer of risk to the products
5) How much do funds charge?
The resource required to hunt down stocks based in a distant country means India funds often carry ongoing charges figures in excess of 1.5 per cent.
