The financial industry is watching India. Expectations are high that Prime Minister Narendra Modi’s new government will push through some long-term reforms that will benefit business and the stock markets and drive economic growth.
With that theme in mind, FSA examines two India-focused funds, one from First State Investments and the other from Aberdeen Asset Management.
The S$63.5m ($50.8m) First State Regional India Fund has a track record dating back to August 1994 while the S$631.7m ($505.2m) Aberdeen India Opportunities Fund was launched in March 2004.
Both funds are structured as feeder funds.
The First State fund invests in the Dublin-registered First State Indian Subcontinent Fund, which in turn has its investment mandate across Indian subcontinent countries such as India, Pakistan, Sri Lanka and Bangladesh.
But the fund is largely India-focused, with about 96.8% allocation to the country as of 31 July.
Likewise, the Aberdeen fund deploys its assets in the Luxembourg-domiciled Aberdeen Global – Indian Equity Fund. This underlying fund seeks to invest at least two-thirds of its assets in equities and equity-related securities of companies in India and those that derive a dominant portion of their business activities in India.
Performance Review
Both the First State and Aberdeen funds have performed well against the benchmark MSCI India Index and regional peers, says Luke Ng, vice president at FE.
Gross Return Bid-Bid monthly line chart over 60 months (from end Aug 2009 to end Aug 2014)
“On a return basis, First State outperformed Aberdeen, the benchmark and its peers’ average every calendar year since 2011. It demonstrates superior capability to maneuver well in both rising and falling markets,” says Ng.
In terms of discrete performance, the First State Fund registered a 62.2% return for the one-year period to 31 July compared with a 48.1% delivered by the Aberdeen fund.
Similarly, over a two-year time frame, First State notched up a 2.12% return while Aberdeen fund suffered with 5.41% negative return.
While both funds have a negative return over a three-year and four-year horizon, the fall was relatively less for the First State fund (-3.63%) compared with the Aberdeen one (-4.05%).
Furthermore, Ng adds that First State delivered 24 positive monthly returns out of the past 36 months, higher than that of 21 for the Aberdeen fund, the benchmark and its peers’ average.
Both funds have featured among the least volatile India-focused funds over three- and five-year periods.
“While the volatility level of both funds were consistently lower than the benchmark and peers’ average, the concentration ratio of the Aberdeen portfolio is higher than that of First State’s,” Ng added.
The top 5 and 10 holdings of First State account for 30.3% and 51.8% of the total AUM, whereas, the figures for Aberdeen are 36% and 57.3% respectively, according to the July 2014 factsheets.
In addition, the number of stocks in the First State fund is consistently higher than that of the Aberdeen over the past few years, according to Bloomberg data.
As Aberdeen is exposed to fewer stocks in the portfolio and the top five and 10 holdings account for higher weightings than that of the First State, the Aberdeen fund is likely to be exposed to higher unsystematic company-specific risk.
However, outside the comparison of the two funds against each other, both products should be able to achieve diversification benefits for their respective portfolios, he added.
Investment strategy review
Both funds pursue a bottom-up approach, but their sector focus is quite different.
“First State has maintained a higher weighting in consumer staples and a lower weighting in information technology for long time. In recent years, exposure in consumer discretionary has been gradually increasing. Relatively, the sector allocation of Aberdeen is much closer to that of the benchmark.”
Consumer staples is the top sector pick of the First State fund with a 23.1% weighting in the portfolio followed by financials that make up 18.5% of the assets. The manager has deployed 13.3% in consumer discretionary companies.
Kotak Mahindra Bank and HDFC Bank feature among the top 10 holdings in terms of First State’s portfolio weighting investments, while Marico, Dabur India and Nestle India are the among its top 10 holdings list in consumer staples.
“Despite both funds focus on long-term investing, it is observed that First State tends to be more actively engaged in short-term moves. For Aberdeen, holdings in the portfolio are relatively stable.”
In the Aberdeen fund, HDFC, along with information technology majors such as Tata Consultancy Services and Infosys are top holdings in terms of portfolio weighting.
The Aberdeen fund has the highest allocation to financials with 21.2% weighting followed by information technology and materials with 19.3% and 15.3%, weighting, respectively. It has invested about 15% and 9% of the assets in consumer staples and consumer discretionary sectors, respectively.
Portfolio Managers
The Aberdeen fund is managed by its Asian equities team. The firm declined to provide the name of the team leader.
The First State fund is managed by Vinay Agarwal.
Fees
Both funds charge an initial fee of 5% and annual management fees of 1.5%. The First State fund’s total expense ratio for the financial year ended 31 December 2013 was 1.81% while the Aberdeen fund was 1.89% for the financial year ended 31 March 2014.
The total expense ratio of both funds is lower than that of the sector average.
And the winner is…
In the universe of funds available in Singapore, FE rates the First State fund with a “5 Crown” rating, which indicates it is ranked in the top 10% among its peers over the past three years. The Aberdeen fund receives the “4 Crown”, which refers to funds ranked in the next 15% after the top 10.
The crown rating measures fund performance in terms of alpha and consistent performance.
Ng prefers the First State Regional India Fund as he says the team demonstrates good capability to generate strong alpha and good risk-adjusted returns for investors in the long-term.
