Q: The U.S. financial sector is a mess due to scandal, regulatory fights and other shenanigans. Some of your top holdings right now are India banks, including HDFC and ICICI. How is the India financial sector different (or similar) to banks in America?
A: India’s banking sector is as vibrant as the U.S.’s. But it is far more fragmented; the country has few large banks, but many small ones. Additionally, the penetration level of the financial services sector still is very low. In other words, there is significant potential for growth, particularly as rising incomes boost consumers’ purchasing power. Our large exposure to this sector reflects our view that banks will play an increasingly central role in providing finance for consumer spending. But care must be taken to pick the right banks — i.e., those that are being run on a commercial basis.
As mentioned, a core holding here is HDFC, which has maintained its sound capital position and weathered the stresses of high interest rates and slower loan growth very well. We also hold its associate, HDFC Bank. Both have been recording healthy net interest margins while growing their loan portfolios. Another of our key investments is ICICI Bank, a leading lender whose strength is in the urban retail segment. ICICI Bank has been strengthening its balance sheet and consolidating its capital. Its management is committed to bolstering its deposit base before pursuing further loan growth. Also noteworthy is that our private bank holdings, unlike their state-owned counterparts, have fared better in maintaining their asset quality.
Q: Investors have access to some of the stocks in your portfolio such as HDFC, ICICI or Infosys as ADRs that trade on U.S. exchanges. But why should they consider investing more broadly in your fund instead of a few India stocks like these?
A: India has over 7,000 listed companies (on the Bombay stock exchange) in industries ranging from IT, banks, materials, consumers and pharmaceuticals. Aside from subsidiaries of top multinational companies, India also has many first-rate home-grown businesses. To tap that huge potential, investors need broader access.
There are caveats, however. India embraces both the best and the worst. The best are conservative because their owners’ money often is in the business and they hate to misuse it, yet at the same time they are respectful of outside shareholders. But as in many of the large emerging-market countries, it takes time to develop a deep understanding of where the best investment opportunities are, which is why we see our track record of investing in India for 15 years as an important competitive advantage. Over that time, our proven process based on firsthand research has uncovered companies whose quality is second to none — not just in India but across Asia. And our stable investment team, having worked closely together over many years, allows us to exploit fully the opportunities as and when they arise. Taken together, we believe our fund has the potential to deliver attractive returns to our investors.
Q: So give me a global economic forecast for the next 12 to 18 months: Better times ahead in 2013, or worse times ahead?
A: In the near term, it is difficult to see better times in global capital markets. Europe’s debt crisis remains at the fore. The underlying imbalances of banking sectors and sovereign borrowers have yet to be resolved, while austerity policies have weakened economies. The U.S. economy, meanwhile, remains tenuous. The housing market appears to be steadying, but persistently high unemployment has impeded consumer spending. The looming fiscal cliff has darkened its outlook further. Asia has not been insulated from these developments, and growth is slowing. Stock markets, therefore, are likely to remain jittery in the months ahead.
India’s real economy is relatively insulated from global developments. For example, less than 30% of the MSCI India companies are in IT or pharmaceuticals, which have significant exports. Most of the companies are domestically driven.
Q: Anything else you’d like to add that we haven’t covered?
A: There are a few things that make our fund unique. First, we have a long-term perspective — the majority of our top 10 positions have been held between five and 10 years. Second, ours is a high-conviction portfolio of some 30-40 stocks, which means it is very different from the benchmark. In fact, we tend not to look at what is in the benchmark when constructing our portfolios; paying too close attention can constrain stock selection. Third, our turnover is generally low, given our buy-and-hold approach. Instead of outright trades, we prefer to top up on price weakness or top slice on price strength. Another key point is that all our portfolios are run on a team basis. Company research duties and cross-cover visits are shared. In this way, we not only benefit from collective wisdom but also overcome blind spots.
Learn more about The India Fund at www.aberdeenifn.com.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.