Indian funds worth a look
Election time is turning out to be a good time for investors in India. There’s a sense of anticipation that a more business-friendly government will take office after election results are announced on May 16 for the world’s biggest democracy and its more than 1.2 billion people.
The latest opinion polls show Narendra Modi’s Bharatiya Janata Party (BJP) and its allies leading the incumbent Congress party led by Sonia Gandhi and her son, Rahul. Voting, which takes place over a five-week period, began on April 7 and ends on May 12.
Among the beneficiaries of the bullish sentiment is the $185-million Excel India, the largest and oldest India fund in Canada. So far this year, it’s up about 15 per cent.
India has recently had several years of relatively sluggish growth. Christine Tan, a portfolio manager with Excel Investment Counsel Inc., says a Modi-led government would be expected to do a better job of getting things done, such as infrastructure development.
Tan and her colleagues in Mississauga oversee the fund, which is managed by Birla Sun Life Asset Management.
In a recent market commentary, the Mumbai-based firm said it expects that the next government, “whether led by Mr. Modi or someone else,” will enact reforms and progressive policies to attract investments.
Valuations of Indian stocks appear attractive, according to Tan. Citing consensus earnings estimates from brokerage analysts, she says Indian stocks as a whole are trading at modest price-earnings multiples, given forecasts of 15 per cent earn- ings growth this year.
Another positive is that growth in exports, along with declining imports, has improved India’s balance of payments. This should help support the value of India’s currency, the rupee.
As is typical of the developing world, the Indian economy is growing at a faster rate than developed markets. Economists’ forecasts for GDP growth in 2014 are mostly 5 per cent or more, or about double that of North America.
Expert active management can pay off in developing markets, as it has historically for Excel India. Since its inception in April 1998, the fund has returned an annualized 10 per cent, beating its benchmark, the BSE Sensex Index, which returned 8.4 per cent.
In doing so, the fund has had to clear a high fee hurdle. Its management expense ratio (MER) is a lofty 3.22 per cent.
Not quite as expensive is HSBC Indian Equity, whose no-load version has a 2.82 per cent MER. However, this fund, actively managed by an HSBC team based in Singapore, has been the weakest performer of the four funds in Canada that spe- cialize in India. The other two — the passively managed iShares India Index (XID/ TSX) and BMO India Equity Index (ZID/TSX) — are exchange-traded funds whose holdings are based on large-cap stock indexes. By seeking only to match an index return before fees, these two ETFs can charge much cheaper MERs: 0.75 per cent for BMO and 0.99 per cent for the iShares ETF. Besides, unlike the two mutual funds, the ETFs don’t pay trailer fees to brokers, which total 1 per cent a year. The ETFs, both launched in January 2010, have during their much shorter history shown the advantage of low costs. Over the three years ended March 31, they’ve modestly outperformed Excel India, with the HSBC fund further behind. Regardless of the fund, investing in a single emerging-market country is a risky proposition. Even if you’re keen on the India investment story, a less volatile alternative is a geographically diversified emerging markets fund that invests in various developing countries, including India. rudy.luukko@morningstar.com Twitter: @rudyluukko