The hypothesis that locally domiciled Indian equity managers have greater insights into the microeconomic landscape for companies, via connectivity with local brokers, networks, and research needs to be tested.
In this note, we seek to assess the performance of local India funds in comparison to foreign-based India funds.
Most investors investing into India from overseas gain exposure to Indian equities via Foreign Funds, ETF’s or Emerging Market Funds. However, we feel active, regionally focused management can add significant value to an investors returns.
Performance over a 10 year period
We have compared performance over a 10 year period, using a year-by-year analysis from July 2004 to June 2014. For each period we compare the median achievement of both local funds and foreign funds.
Local Funds outperformed Foreign Funds by 1.85% and the BSE 200 by 2.02% per annum over the 10 year period. This produces a significant compounded effect over time. Additionally local funds seem to deliver stronger returns in up markets due to their ability to identify a broader set of growth opportunities. We feel this advantage is driven by networks, contacts, local brokers and ability to invest in more mid and small cap companies.
We accept that the median fund is not necessarily the investment experience of an investor. However, it presents a method by which to portray the average funds return. The significant dispersion of returns for local funds, given that there are significantly more local funds than foreign funds, means that strong due diligence in manager selection can pay handsome rewards through improve returns.
It is our view that local investment managers present a strong choice for investors, given significant local insights, connectivity to markets and information and the ability to invest in lower capitalisation names due to generally lower AUM size.
This allows investors to participate in the growth stories of India from an early stage when their return trajectory is far steeper. Our multi-manager philosophy ensures that the underlying investment teams managing the funds, remain the within the optimal selection set of India Avenue’s Investment Team at all times.