With the focus this week on Indian equities, it might be pertinent to start with the fact that the benchmark section below is based on information gleaned from our connection with Financial Express. This information is a mix of "offshore" and "onshore" Indian funds, where "offshore/onshore" refers to the domicility of the fund rather than the underlying assets which are, pretty much "onshore".
In other words, the Tata's and Reliance's are Indian companies listed on the Indian bourses, doing their business in India (and abroad), but, where they feature within "offshore funds," the shares are held in wrappers domiciled out of the country.
This means that fund fact sheet inspections show a curious mix of domicilities. India (obviously) features; so too do does Ireland where the Congest Fund is managed by Wojciech Stanislawski (who doesn't sound like a first generation Indian), out of an Office in Paris. The UK features as an offshore "dom" within the top performing results, so too does Mauritius, where the highly successful Unit Trust of India (UTI) stable's offshore arm is based.
What do we learn from the stats? I am going to focus on three issues. First up: the importance of asset allocation. Translated: look at the bottom of the Indian Markets over five years, where the UOB Fund has made 26.1 per cent; this result would have featured in the top five US equity funds (over the same period) if the UOB performance results had accidently got mixed up with US results. The big lesson: it's important to have had access to the Indian equity market over the last 5 years where even the worst performances are not "too bad' compared to the majority of other asset class results.
Secondly, whilst there might be a tendency for investors to punch-the-air as if a stoic century has been scored, beware the next ball. Historically, the Sensex indices have shown a tendency towards volatility. When I meet purveyors of Indian Funds they frequently point to the "25 per cent p.a. probable growth rate", all this "probability" is based on the: "we are chasing China" growth story. And, whilst the story is a good one, beware the potential of a 50 per cent downward deviation. Any such deviation would require a 100 per cent return to get your money back. Great for regular premium investing or "averaging" more dangerous for lump sum investors.
In short, historical standard deviation figures still make India a "risky" market.
Finally, let's look at market "efficiency", where efficiency can be translated to mean the amount of information. According to Eugene Fama's Efficient Market Hypothesis if everything is known about an asset then the asset is at fair value. In an efficient market lots is known to everyone so the good assets are purchased by everyone and the "market beta" will be difficult to beat.
The gap
The gap between the ‘market beta", i.e. the indices and the alpha top five performers is such that it suggests that India still looks like a good stock-picking market. Look at the ‘top' performers versus the Indices below.
The difference suggests that the top fund managers are finding information about specific assets at a different (faster?) rate than the herd. As a result the alpha performance is considerably superior to the indices. Beware however a falling market- would the trend change in a falling market?
Sean Kelleher is chairman of Mondial Financial Partners.
