HEAD-TO-HEAD: Goldman Vs Aberdeen

The IMF has recently retained its growth forecast for India this year at 7.5%, underpinned by strong private consumption, which has been buoyed by lower energy prices and higher real income.

A goods and services tax is expected to be approved this year, which will help to strengthen public finances.

Tailwinds include weak exports and sluggish credit growth, which are likely to weigh on the economy.

There are also some frustrations with the pace of reform and infrastructure investment in India, and investors would like to see policymakers speed up structural reform implementation.

Against this backdrop, FSA compares two Indian equity funds – the Goldman Sachs India Equity Fund and the Aberdeen India Opportunities Fund.

Ryan Sim, head of investments for OCBC Bank Wealth Management, provides a comparative analysis.

“Given that valuations of Indian equities are no longer cheap, we are taking a cautious stance in the near term and would wait for a better entry point. Longer term, the progress on reforms, which has been patchy so far, would be the major catalyst for further market upside,” Sim said.

Investment Strategy

The two funds both invest in Indian equities. While they both use the MSCI India Index as a benchmark, their investment approaches differ, Sim said.

Aberdeen believes that it is more important to focus on absolute returns over the long-term than index-relative returns, and does not believe that indices provide meaningful guidance on the prospects of a company or its inherent worth.

“The investment process is driven by fundamental research, as no stock position is taken until a team member has visited the company. Although Aberdeen does not have a domestic presence in India, the team makes regular visits to companies in India,” he said.

Aberdeen estimates a company’s worth based on quality and price, he said. Quality is defined in reference to management, business focus, balance sheet and corporate governance, while price is calculated relative to key financial ratios, market peer group and business prospects.

“Portfolios are constructed to maximise exposure to the most attractive companies filtered from the stock selection process. The team runs a highly concentrated portfolio that typically contains 25 to 35 stocks,” he said.

Turning to the Goldman Sachs fund, the investment philosophy of the team is to buy what they consider to be a sound business that is trading at a discount to intrinsic value, he said.

“They measure a sound business as one which can in the future produce a return-on-equity above the corporate average in the economy, and focus on free cash flow as the key metric.”

Goldman is also on-the-ground. Its India equity research team is based in Mumbai and conducts fundamental research, focusing on growth and profitability drivers through meetings with company management, suppliers, competitors and customers, Sim said. They may also visit company production facilities to gain first-hand knowledge of operations.

The team looks for companies with an estimated intrinsic value substantially different from what the market has priced into the stock. They use a variety of valuation methods, but a discounted cash flow analysis is always part of the research process, and free cash flow is a key metric for all but financials stocks, Sim said.

Portfolio construction is driven by bottom-up stock selection, and the fund currently contains about 100 stocks in its portfolio.

“Portfolio concentration is not the only clear differentiation between both funds. Although both funds have a tilt towards growth stocks, a look at the data derived from Morningstar shows both funds have a different bias toward market cap within their portfolios,” he said.

Sector Comparison

Source: Fund factsheets

The Aberdeen fund has a strong bias towards large caps, as shown by its more than 90% exposure to such stocks and an average portfolio market cap of $12.7bn, compared to the Goldman Sachs product’s 56% exposure to large caps and an average portfolio market cap of $3.8bn.

An observation is that the size of the Aberdeen fund is significantly larger than the Goldman Sachs one, which may cause concern among certain investors who could feel the fund may be less nimble, he said.

“However, Aberdeen’s buy-and-hold strategy, resulting in low portfolio turnover and potentially reducing costs associated with managing larger portfolios, mitigates capacity concerns to some extent,” added.

Performance

As of April 30. Aberdeen’s one-year performance was -4.09% while Goldman returned -3.38%.

Over the three- and five-year periods, Aberdeen returned 24.3% and 17.8%, respectively, while the Goldman fund had higher returns, 42.6% and 37%, respectively, Sim said, citing data from Morningstar.

In the first four months of 2016, which was characterised by strong volatility, the Goldman fund registered a return of -4.14% and the Aberdeen fund was 0.23%, he added.

Although the Goldman Sachs fund has mainly outperformed the Aberdeen product in the medium-to-long term cumulatively, its calendar year returns show a mixed picture, Sim said.

“Given a very concentrated portfolio, the Aberdeen fund could possibly underperform when there is a broad-based rally. Using the MSCI India NR as the comparison index, the Goldman Sachs fund seems to display a relatively better upside capture and this could be attributed in part to its small- and medium-cap exposure.”

Goldman’s fund also has higher volatility. For the trailing three years, its volatility was 20.9 and Aberdeen was 17.7, according to FE data.

The two funds over the last three years

 Source: FE Analytics