Kunal Desai’s £105m Neptune India fund provoked a lot of discussion among professional investors at last week’s FE Trustnet Select event on emerging markets and Asia Pacific ex Japan.
Emerging markets in general have experienced a torrid time over the last few years, with the MSCI Emerging Markets index falling 12.4 per cent year-to-date and 10.92 per cent over five years, underperforming the MSCI World index by 65.83 percentage points.
Performance of indices over 5yrs
Source: FE Analytics
The market’s poor performance can be attributed to a variety of headwinds including political unrest, the strengthening of the dollar, the taper tantrum of 2013 and, more recently, the collapse in commodity prices.
However, an increasing number of investors have begun to see better prospects in India, following the election of pro-business reformist Narendra Modi as prime minister last year.
While the market spiked following his landslide victory and continued to climb until earlier this year, it has since dropped as investors began to lose patience waiting for his economic reforms to be implemented.
This has opened up an attractive gap in the market according to many investors, with the likes of Columbia Threadneedle, Newton and Hermes all citing the tailwinds they can see for the once-unloved region at the FE Select event.
Neptune India’s Kunal Desai was the only non-broad-based fund manager in attendance and, following India’s recent popularity among investors, sparked a great deal of interest. 
Neil Shillito (pictured), managing director at SG Wealth Management, is keen to buy into the fund in the near future. While he advocates pairing different funds within the same sector to reduce correlation, he says this is trickier when it comes to emerging markets funds and so having high conviction in an individual fund is particularly important.
“With emerging markets funds you can’t really pair funds in that sector because emerging market funds are what they are and different managers will invest in different geographical areas in emerging markets,” he said.
“There really is no such thing as an emerging market smaller companies fund, for instance, or an emerging market growth fund – they’re just emerging markets.”
“So, the reason I was so struck by Neptune India was that I thought the manager was very confident in his process but, more than that, the argument was compelling – very often when you hear stories that everything has turned around and so on, you can be a bit jaundice and say to yourself, ‘where have I heard that before?’”
Shillito believes that the political situation in India is attractive in general and says that, not only is Modi introducing reforms in what was once seen as a corrupt and overly bureaucratic country, he is incentivising the individual states within the Indian Federation by providing benefits for them if they actively support enterprise and invest in business.
“It’s a bit like a bonus system within a company, and that incentivises people to do a good job and that’s what he’s doing in India. That alone I think is a very powerful argument because there is no doubt that it’s already a powerhouse of industry, and I think it’s going to be more so, and I can see that there are real long-term growth prospects there,” the managing director said.
“I like Desai’s fund in particular because he has a very good grasp of the political situation and how it affects the different industries. I think his stock picking is based on a very close understanding of what the economic situation is in the country – that’s why I think he’s doing a very good job.”
Over Desai’s tenure, the fund has outperformed its benchmark by 11.31 percentage points, providing a total return of 26.44 per cent.
Performance of fund vs benchmark over manager tenure
Source: FE Analytics
Ben Willis, head of research at Whitechurch Securities, won’t necessarily be buying the fund as he isn’t looking to increase his exposure to Indian equities at the moment, but he is keeping a close eye on it and was particularly encouraged by the manager’s ability to steer away from the benchmark to generate alpha.
“From a regional aspect Modi’s reforms have been slow to be implemented – obviously there was euphoria when he got in and the market rose quite sharply after that. He has got the political will and the backing to implement those reforms, they’re going to be coming in next year. That’s a key tailwind,” he said.
“Desai’s argument was that, even though the market looks expensive compared to other markets, their earnings cycle is starting from a trough so the probability that you’re going to get earnings growth from the market is quite high. So despite it being on a relatively high P/E that multiple will adjust because earnings growth will come through if you invest now.”
While Willis sees the opportunity that India could offer, he says that he already holds New India Investment Trust and he is wary of being overweight the region.
However, he also invests in broad-based funds that are overweight India and has been investing in First State Asia Pacific Leaders for more than a decade, which at one point held up to 20 per cent in region.
“If we decided we did want greater country-specific exposure to India, Neptune India would definitely be on the radar if we wanted something more open-ended for liquidity reasons, and the fact that it could possibly have cheaper charges [than an investment trust],” he added.
As Willis mentioned, some investors have been deterred from the region due to its high valuations compared to other areas within emerging markets.
Simon Evan-Cook, multi-asset manager at Premier, finds it uncomfortable buying into any region that has undergone a strong rally and as such, won’t be buying into Neptune India or any other India fund.
“I totally buy the long-term view of India and all the changes that are happening seem positive, but we’re more likely to try and buy something where it’s just fallen sharply rather than something that’s just rallied because we’re not really momentum investors – we’re more about finding value,” he explained.
“It’s harder to justify the value of India given how far it’s come, although we understand the growth arguments that go with that.”
Not only this, he feels that the best time to have bought India would have been two years ago when sentiment towards the region was much more negative.
“Now everyone has plenty of good things to say about India and that makes us a little bit nervous about it as a place to invest,” Evan-Cook continued.
“I’m sure there are good stocks and good companies to be holding there, but we wouldn’t want to effectively overweight it by buying an Indian fund.”
Neptune India has a clean ongoing charges figure of 1.06 per cent.
