Nomura India Equity addresses capacity as fund doubles returns of index

The manager behind one of the top performing funds for India says he is facing questions over capacity as it enjoys bumper inflows following performance figures more than double those of the MSCI index.

The Nomura India Equity fund returned 39.4 per cent over the last year compared to 18.4 per cent for the MSCI India. In the last three months alone the fund has returned 17.1 per cent compared to 8.8 per cent in the index.

It has delivered top quartile performance in every period from three months to five years, according to Morningstar data from March.

Capacity for the strategy is a “a number close to $5bn” and is an “issue coming up for discussion more than it ever has”, Mehta says.

“As long as we’re able to follow the same philosophy and same strategy we’re fine with the fund as it’s currently growing,” Mehta says, adding inflows haven’t changed the way the fund is managed.

The flagship fund for Japanese investors holds $3bn and fund manager Vipul Mehta says they are ramping up marketing efforts for the Ucits version of the strategy, which has assets of just $91m and had been “on the back burner”. A year ago assets in the Ucits fund were only $50m.

“It’s the same 40 to 45 stocks that we manage. All the inflows we’ve been getting, and you can imagine the traction we’ve been getting with these performance numbers, we’ve just been adding to the existing stocks that we have.”

India is absolutely expensive’

Alongside predictability and consistency, Mehta favours companies that are simple. “I could explain all of the stocks in the portfolio in two minutes flat,” he boasts.

“Because of that we’ve avoided the benchmark heavyweight stocks. For example, Reliance Industries is one of India’s largest companies, market capitalisation is around $60bn and we don’t own it at all. It’s got five or six large businesses. We have no idea of capital allocation, we’ve got no idea of how the balance sheets work and how money flows through.”

Mehta warns in India investors “pay a price for good stuff”.

For example, Avenue Supermarkets, a fund holding, listed in March with 60 times one-year forward earnings, according to Mehta, but one month later was trading at 80 times forward earnings.

“There is absolutely no running away from the fact India is an expensive market, but it’s always been the case. India’s always quoted at a premium to emerging market valuations, but that comes with earnings growth and a return on equities.”

Home bias

The fund’s top holdings are financial companies: HDFC Bank, Yes Bank and Housing Devt Finance, representing 9.6 per cent, 8 per cent and 6.9 per cent respectively of the portfolio.

“The banking sector in India is perceived to be in a lot of trouble right now with non performing loans and problems like those. That’s restricted to two thirds of the banking system in India right now, which we don’t own at all,” Mehta says, explaining their heavy concentration in financials highlights their bottom-up approach.

Real estate is a sector Mehta is warming up to, describing its as a “potential game changer” for India.

“This is because of a new policy that has been enacted by the Government on affordable housing,” Mehta says. “Here is a policy that has been devised very well, is economically viable, and designed to be executed completely by the private sector.”

The fund is almost wholly domestically focussed Mehta says, while estimating the index is 40 to 50 per cent internationally exposed. “We’re not the biggest experts in predicting what commodity prices do and what China does and how things move.”

This is the despite that the team, which includes senior portfolio manager Vipin Kapoor and assistant portfolio manager Poornaa Venkatesan, is based in Singapore. “Our experience has been that it’s actually been an advantage to be away from the noise that is generated within the country and the surfeit of information that is available on the ground,” Mehta says.