Capitalising on India (Part II)

Local is better when it comes to investing in developing market economies!
Mugunthan Siva

India Avenue

As we continue our series on navigating investment opportunities in India, we explore the advantages of partnering with local asset managers rather than relying on foreign asset managers with broader Emerging Market or Asia mandates. 

Given the distinct dynamics of India’s stock market, ranging from governance frameworks and political nuances to its high-growth potential, market inefficiencies, and cultural intricacies—local expertise provides a significant edge. A deep, on-the-ground understanding allows for more informed decision-making, better risk management, and the ability to capitalise on market opportunities that may be overlooked by foreign investors.

Partnering with Local Experts

After establishing that long-term structural investing in India outperforms tactical exposure, we compared the primary investment vehicles that provide access to the Indian market: Emerging Market (EM) funds and locally managed, India-focused funds.

Our analysis reveals that EM funds have historically added limited value to their India allocations. In contrast, locally managed, India-focused funds demonstrate a much stronger environment for alpha generation. According to the S&P Global Spivacard report from June 2024, 38% of Indian fund managers have outperformed their benchmarks—significantly surpassing the corresponding rates in the US (12%) and Australia (15%).

Moreover, as shown in the table below, Indian fund managers have delivered a considerably higher average annual alpha over the past decade. This performance underscores the inefficiencies in the Indian equity market, which presents a compelling opportunity for outperformance through active, locally managed, India-centric strategies.

EM vs India Fund Alpha

Source: Morningstar (31/08/2024), EM is an average of 13 prominent EM funds (and is not reflective of any specific fund).
Source: Morningstar (31/08/2024), EM is an average of 13 prominent EM funds (and is not reflective of any specific fund).

It is noteworthy that the Indian stock market, represented by the Nifty 500 index (INR as of 31/08/2024), delivered an average annualised return of 12.6%. Of this, more than one-fifth of total returns were driven by alpha generated by Indian fund managers, while beta (market returns) accounted for the remaining 80%.

This breakdown further underscores the inefficiencies of the Indian equity market and highlights the significant role of active management in achieving outperformance. It reinforces the case for locally managed, India-only funds, which are better positioned to capitalise on these inefficiencies and translate them into enhanced returns for investors.

EM vs India Fund 3Y Comparison – Value Add from Stock Selection

Source: Refinitiv, as of 30/09/2024. Local India Equity Funds 3-year value-add. *EM fund performance is an average of 13 prominent EM funds (and is not reflective of any specific fund).

Source: Refinitiv, as of 30/09/2024. Local India Equity Funds 3-year value-add. *EM fund performance is an average of 13 prominent EM funds (and is not reflective of any specific fund).

To delve deeper into the disparity, we analysed alpha generation by EM funds and India-focused funds over the last three years (2021–2024) during a period of strong market rally. The findings reveal that the average EM funds on average failed to generate alpha and ranked near the bottom in terms of contribution from stock selection. 

In contrast, the average India-focused fund delivered a total alpha of 15.9% during the same period. This significant difference highlights the superior alpha potential of locally managed, India-focused strategies and underscores how actively managed, dedicated exposure to Indian equities can drive better investor outcomes compared to broader universes like EM mandated funds.
........
This document (‘Document’) has been produced by India Avenue Investment Management Limited (‘IAIM’) ABN 38 604 095 954, AFSL 478233 and has been prepared for informational and discussion purposes only. This does not constitute an offer to sell or a solicitation of an offer to purchase any security or financial product or service. Any such offer or solicitation shall be made only pursuant to a Product Disclosure Statement, Information Memorandum or other offer document (collectively ‘Offer Document’) relating to an IAIM financial product or service. A copy of the relevant Offer Document relating to an IAIM product or service may be obtained by writing to us on info@indiaavenueinvest.com or by visiting www.indiaavenueinvest.com. This Document does not constitute a part of any Offer Document issued by IAIM. The information contained in this Document may not be reproduced, used or disclosed, in whole or in part, without the prior written consent of IAIM. Past performance is not necessarily indicative of future results and no person guarantees the performance of any IAIM financial product or service or the amount or timing of any return from it. There can be no assurance that an IAIM financial product or service will achieve any targeted returns, that asset allocations will be met or that an IAIM financial product or service will be able to implement its investment strategy and investment approach or achieve its investment objective.  Statements contained in this Document that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of IAIM. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. Additionally, this Document may contain “forward-looking statements”. Actual events or results or the actual performance of an IAIM financial product or service may differ materially from those reflected or contemplated in such forward-looking statements. Any trademarks, logos, and service marks contained herein may be the registered and unregistered trademarks of their respective owners. Nothing contained herein should be construed as granting by implication, or otherwise, any license or right to use any trademark displayed without the written permission of the owner. Certain economic, market or company information contained herein has been obtained from published sources prepared by third parties. While such sources are believed to be reliable, neither IAIM or any of its respective officers or employees assumes any responsibility for the accuracy or completeness of such information. None of IAIM or any of its respective officers or employees has made any representation or warranty, express or implied, with respect to the correctness, accuracy, reasonableness or completeness of any of the information contained in this and they expressly disclaim any responsibility or liability therefore. No person, including IAIM has any responsibility to update any of the information provided in this Document. Neither this Document nor the provision of any Offer Document issued by IAIM is, and must not be regarded as, advice or a recommendation or opinion in relation to an IAIM financial product or service, or that an investment in an IAIM financial product or service is suitable for you or any other person. Neither this Document nor any Offer Document issued by IAIM takes into account your investment objectives, financial situation and particular needs. In addition to carefully reading the relevant Offer Document issued by IAIM you should, before deciding whether to invest in an IAIM financial product or service, consider the appropriateness of investing or continuing to invest, having regard to your own objectives, financial situation or needs. IAIM strongly recommends that you obtain independent financial, legal and taxation advice before deciding whether to invest in an IAIM financial product or service.

1 stock mentioned

Mugunthan Siva
Managing Director
India Avenue

Mugunthan Siva is Managing Director of India Avenue, an Australian based boutique investment management company, domiciled in Sydney, with a presence and advisory network in India. He has over 30 years experience in Australia and is lead...

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.

Comments

Sign In or Join Free to comment