Shared Fund Investing - Time for you to Add Indian Funds

[AlmeidaDavid]

Since the Asian economy has grown in dimensions and importance, we've been slowly adding the single-country funds dedicated to Asian countries to our international funds list. The very first country we added was Japan, and much later China. What we required to be able to present you with the added threat of a fund dedicated to just one country was a reasonably large and diversified capital market that offered a portfolio manager the chance to diversify the portfolio even inside a single country. As the Japanese and Chinese economies grew and new industries blossomed, we thought that test was met. We now genuinely believe that the Indian economy and capital markets also meet our test. With this dilemma, then, we are adding three India funds to your list: Matthews India, WisdomTree India Earnings (ETF) and PowerShares India (ETF). We might add a couple of other funds to the list over the following few issues.

Why India?... Frequently previously whenever we spoke about Asia and its rapid growth we cited the twin dynamos powering that growth, China and India. Coupling the two served its purpose, but we now believe the two are accepting separate identities. As we have been listening and reading over the span of the past 4 or 5 months, we attended to the conclusion there are differences in the paths that China and India will be overtaking the months ahead. Both is likely to be growing rapidly (or intend to) but one is worried about too-rapid growth (China) while another is aiming at even faster growth as time goes on (India).

To sort things out, and to obtain a better feel for the Indian economy and the capital market, we spoke to Sharat Shroff, the portfolio manager of the Matthews India Fund. The first point that Shroff made is that "some of the days ahead for India (speaking of growth) might be much better than what has been seen in the last 2-3 years." For some historical perspective, Shroff pointed out that India's growth rate acquired after the government adopted a policy of setting up the economy in the first 90's. Ever since then, as more reforms were gradually introduced, growth has found further. By 1995, India's growth hit the high single-digits range and remained there (on average). Such growth is currently taken since the benchmark.

Shroff emphasized that why is India's growth distinctive from other emerging countries is that in large part it arises from domestic demand, not from exports or commodities. There is no large-scale overhaul that India must undergo, he remarked. What Shroff is driving at is that in the post-recession world China's trade surpluses and the U.S. deficit will need to shrink as they are unsustainable regarding ETF Indien, Indien ETF. India faces no such issues.

The next point advanced by Shroff is that the private sector accounts for roughly 80% of India's growth. The significance of that's that in India we are discussing businesses that are oriented toward profits and return on capital. This isn't always the case elsewhere in Asia. Because of the conditions, India supplies the investor to be able to spend money on top quality companies with solid business models.

As for Matthews India, Shroff said that the fund does not necessarily purchase the large cap, world-renowned companies (the Indian blue chips). As Shroff use it, in the event that you compare our portfolio with the benchmark, you will notice that two-thirds of our portfolio is comprised of small- and mid-cap stocks. We try to be a bit more forward-looking. What the fund is trying to find are those (smaller) companies which can be "participating in the country's growth and have the potential to become one of the larger companies two, three or maybe five years from now."

The Indian market...We asked Mr. Shroff, what index you ought to watch to keep track of the Indian market. He answered that the Sensex is the traditional index followed. But in recent years, the professional community pays more attention to the S&P CNX Nifty Index.

As for valuations, the Indian market, says Shroff, is selling at a price-earnings ratio around 15-16 times and at about three times book value. This really is slightly above historical average valuations. Also Shroff remarked that the Indian market has traditionally been expensive compared to its emerging market peers. The premium has ranged from as little as 15% to as high as 45%. At this time he puts the premium at the low end of the range.

There's some justification for the premium, he added. The return on equity for Indian firms is in the 18-20% range, which, as he use it, "is very robust." Another reason refers back to the internal sources of India's growth so that you get less volatility than you do from a "commodity producer."

That is not to say that the Indian market isn't volatile. "Even though the economy might be dancing to its tune," Shroff warned, "when foreigners were pulling out money from all emerging markets in 2008, the Indian market went via a very severe correction. (In fact) in the last 3 or 4 years the Indian market indicates some correlation with the S&P 500." (We realize that recently to have been true of emerging markets as a whole.)

Shroff turned to the issue of volatility more than once. He was preaching to the converted. We're restricting our advice regarding the Indian funds to Venturesome investors only. This is actually the same policy that individuals have already been following pertaining to the pure China funds. The policy isn't written in stone, but the world economy will have to be functioning closer on track before we'd consider any relaxation.

After the interview with Shroff, we were even more convinced that the single-country India funds belong in our fund list. Not just is India growing rapidly, but we be prepared to begin to see the emergence of more investment -- worthy companies as opportunities arise. Taking into consideration the potential, you are able to appreciate why Asia and the emerging markets, generally speaking, have grown to be the biggest market of the investment world's attention.