Markets
What's Driving the Asian Giants?
For China, it's manufacturing. For India, it's services. For you, it means profits.
By Andrew Tanzer, Senior Associate Editor
From Kiplinger's Personal Finance magazine, December 19, 2005
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Funds that dial into the Indian service economy
India's economy is a great long-term story, but be aware that its white-hot stock market may be overdue for a correction. The Bombay index has soared 170% since April 2003, including a 20% jump in the first ten months of 2005. Still, Indian stocks don't appear hugely overpriced on a price-earnings basis. An index of 50 large Indian companies recently traded at 15 times the past year's earnings.
Overachiever. Over the past few years, Eaton Vance Greater India fund has performed even better than the sizzling Bombay index. The A shares of this open-end fund (symbol ETGIX; 800-225-6265), run by Lloyd George Management, gained 23% in the first ten months of 2005 and returned a rousing 53% annualized over the past three years. But this is an expensive fund. The A shares levy a front-end sales charge of 5.75% and carry annual expenses of 2.77% (the B shares come with a deferred load and annual fees of 3.27%).
Manager Samir Mehta, a Bombay native based in Hong Kong, scours the Indian landscape for companies with high returns on equity and an ability to address a global market. Software fits the bill nicely. "Indian information-technology companies provide quality services at prices much cheaper than in the U.S.," says Mehta, 38. He holds Infosys and Tata Consultancy Services, two stalwarts of India's service economy.
An accountant by training, Mehta also finds it hard to resist Indian-listed shares of the local subsidiaries of multinational corporations. In the 1970s, the Indian government forced foreign companies to sell stakes of their Indian units to local investors. "Nowhere else in the world do you get access to multinational subsidiaries of the caliber of those in India," says Mehta. Two of his largest holdings are the local units of Siemens and ABB, leading makers of power equipment.
On a roll. Talk about a Roman candle. Make that an Indian candle: The NAV of the closed-end Morgan Stanley India Investment fund (IIF, $41) soared 49% over the past 12 months to November 1, according to Morningstar, and gained an annualized 22% over the past five years. The fund traded at a rich 13% premium to NAV in mid November. Consider waiting for the premium to shrink to single digits before investing (you can find discount and premium information at www.closed-endfunds.com). Annual expenses, at 1.40%, are reasonable.
Narayan Ramachandran, the Singapore-based managing director of Morgan Stanley's emerging-markets team, focuses on Indian companies with improving cash flows. Such companies, he reasons, can use the cash to invest in attractive business ventures, or return money to shareholders via dividends or share buybacks.
A favorite theme is the explosive growth of credit. Ramachandran, 43, notes that although consumer lending is growing 30% to 40% per year, lenders still have plenty of opportunities to make inroads with increasingly wealthy Indians. Among his largest holdings is Housing Development Finance, the leading mortgage lender, and Hero Honda, a unit of the Japanese giant; easy credit boosts sales of its motorbikes.
Notable newcomer. During a recent visit, Andrew Foster observed a wave of entrepreneurship sweeping all across India. Even in Calcutta, that heart-rending symbol of poverty, he was impressed with the commitment to progress, including a construction boom in roads and housing developments. "The place had changed dramatically over the 20 months since I'd last visited," he says.
Foster is the manager of the new Matthews India fund, the first no-load, open-end fund devoted to that nation's stocks. Foster, who's based in San Francisco, will focus on companies involved in financial services, computers and the Internet, as well as producers of consumer goods that benefit from India's rapidly rising living standards. "We're big believers in the breadth and depth of growth in consumption," he says. Foster, 31, plans to invest in companies of all sizes using a growth-at-a-reasonable-price strategy.
Although Matthews India is a blank slate, the firm has compiled a solid record with its other Asia funds. The fund (MINDX; 800-789-2742) estimates annual expenses of 2.0%.