India cannot completely dodge the downdraught from a US rate hike this summer. But the country may prove to be the most resilient emerging market. Helped by cheap oil, India’s economy expanded 7.9% in 1Q2016 — the fastest pace in four years. In contrast, the fortunes of fellow BRICs such as Russia and Brazil have plunged, while China struggles under excessive debts. The International Monetary Fund sees India sustaining growth at over 7% for 2016/17, more than double the projected global growth rate.

Despite glowing macros, portfolio managers curiously sound a cautious note over the near term. Risks cited include the slow pace of pro-business reforms and the historically volatile impact of foreign fund flows on India’s stock market and currency. On the ground, investing in this populous country of 1.3 billion people and 29 states is a daunting exercise. The Indian stock market is home to companies that range from tech firms that are major players in global outsourcing to domestic conglomerates praying for a good monsoon to boost rural consumption.

But by and large, the 16 actively managed India Equity funds sold in Singapore do a decent job. Fourteen funds have outperformed the MSCI India Index over three years. These funds look beyond established index names that often operate in protected industries and earn inferior returns on capital. “India continues to be a stock picker’s market and there are abundant opportunities, owing to wide disparities in valuation, earnings prospects and balance-sheet quality,” says Sandeep Kothari, portfolio adviser to Fidelity Funds – India Focus Fund.

The top performers
Improving rural incomes and infrastructure are key targets in India’s 2016 budget. The $1.3 billion Pine-Bridge India Equity Y is positioned to benefit, as it has nearly 40% invested in industrials and basic materials companies. One of the fund’s top three holdings at 8.5% is $9.9 billion cement-maker Shree Cement Ltd, which is up 16.5% this year. Other holdings include agro-chemical stocks such as Sharda Cropchem, up 46.4%, and Bayer CropScience Ltd, up 15.5%. Agriculture stocks have performed well this year because of forecasts of monsoon rains after two years of drought.

PineBridge India has the highest and most consistent returns over most time frames. Notably, the fund returned 4% over the past year, while almost all other funds lost money. Low exposure to financial services companies such as banks — the lowest among all the funds at 8% — has helped. Indian banks face rising bad loans and have a March 2017 deadline to clean up their balance sheets. “It is hard to understand how these companies [Indian financial companies] will be able to grow without diluting the existing shareholdings significantly. We are also not comfortable with the accounting treatment for distressed loans by many of the companies,” says Huzaifa Husain, head of India equity at PineBridge Investments.

In contrast, the $4.1 billion Franklin India I Acc USD — the biggest fund — has nearly a third of its assets invested in financials. Five of the fund’s top 10 holdings are banks. However, Franklin India largely avoids state-owned banks, in which bad loans are mostly concentrated. Eight of the fund’s nine financial holdings are private banks. Through Mahindra & Mahindra Financial Services (M&M), Franklin also gains exposure to India’s massive agricultural sector, upon which half the population depends for their livelihood. M&M is a leading rural and agricultural finance company that has gained 35.4% this year on the back of above-consensus 1Q earnings. “The shares [M&M] also benefited on forecast of an above average monsoon that could help improve tractor and utility vehicle sales,” says Franklin India’s investment team in an April note.

A top-quartile performer over one and three years, the $63 million First State Regional India fund feeds into the larger $372 million First State Indian Subcontinent main fund. The latter, however, is not available for sale in Singapore. Vinay Agar wal, First State Regional India’s fund manager, favours conviction-based, bottom-up investing that is “benchmark-agnostic”. This shows up in a portfolio comprising a mixture of stable MNCs and riskier turnaround bets.

Stocks held include Marico, which transformed from a minor commodity trader into a personal care and foods major with close to US$1 billion ($1.36 billion) in sales; and technology giant Infosys, whose management transition from the original founders to professional outsiders is delivering creditable improvements. Infosys is the feeder fund’s top holding at 7%.

The First State Regional India fund currently has one of the biggest allocations — nearly 20% — to consumer staple companies. These include F&B giant Nestlé India and household care producer Hindustan Unilever. But both companies trade on expensive price-to-earnings ratios of more than 100 and 45 times respectively, according to Bloomberg. Agarwal believes the valuations are justified. India’s favourable demographics and rising levels of income and wealth imply a “multi-decade growth opportunity” for these dominant consumer franchises.

Other noteworthy fund choices
Just over 15% of the $1.5 billion JPMorgan India A (dist) USD fund’s assets are invested in basic materials, with an emphasis on cement companies. Rajendra Nair, managing director and portfolio manager of JPMorgan’s emerging markets and Asia-Pacific equities team, notes that “these are well run companies that will be a major beneficiary from a cyclical recovery and a play on infrastructure spending”. Cement stocks such as Ultratech Cement, Ambuja Cements and ACC Ltd feature in JPMorgan India’s top 10 holdings and have gained an average of 15% this year.

Like PineBridge India, the $2.3 billion Goldman Sachs India Equity Portfolio Base Acc fund leans towards agriculture-linked stocks. These include crop chemical and seed manufacturer UPL Ltd and tractor manufacturer VST Tillers Tractors. Both stocks are up 35.1% and 26.2% this year. Overall, the fund’s 16.5% annual returns over three years place it in the top quartile. But of all the funds, it charges the highest expense ratio of 2.25% and has a maximum front load of 5.5%, which may prove a long-term drag.

Meanwhile, a relatively new fund is the $206 million Schroder ISF Indian Opportunities I USD, launched in September 2013. The fund achieved a top-quartile performance in the past year. Privately owned lenders in the financial services sector were the top contributors, says Schroders’ Asia Investment Team in an email. The UK-based fund house taps into on-the-ground expertise from its 25%-owned Indian asset manager Axis Asset Management Co.

In contrast, the $2.2 billion HSBC GIF Indian Equity AD fund and the $212 million Eastspring Inv India Equity A fund, affiliated to UK insurer Prudential plc, have persistently languished in the bottom quartile. Year to date, these two funds have fallen the sharpest, down 8.3% and 6.1%, respectively. The poor performance of HSBC GIF Indian saw the fund downgraded to “neutral” from “bronze” by Morningstar’s analysts. Investors have also pulled out $443 million over 13 consecutive months.

(Stock price returns are in Indian rupee terms. Fund returns are in Singapore dollar terms.)

This article appeared in the Personal Wealth of Issue 732 (June 13) of The Edge Singapore.