For many investors dedicated Indian equity funds remain a specialist sector, reserved for those with a specific interest in the fledgling market economy.
Difficulties in gaining access to the market has previously been a challenge for investors with restrictions over foreign ownership of Indian companies.
Yet in an era of low growth investors have increasingly turned to faster growing economies in search of better returns.
The world’s seventh largest economy and supported by a young, educated population and growing middle class, India continues to exhibit strong growth with the International Monetary Fund forecasting a 4.9 per cent rise in GDP during 2017.
A number of funds have emerged over the years to become an established part of the Investment Association universe of funds, albeit with no dedicated sector to help benchmark performance.
The bespoke sector includes products from well-known fund management firms, such as Fidelity, Barings, Franklin Templeton and Jupiter among others.
Using FE Analytics, FE Trustnet compiled a sub-sector made up of Indian equities funds and compared it with the MSCI India index to find out which were the best performing funds of 2016.
FE Trustnet’s IA Indian Funds sector vs MSCI India index in 2016
Source: FE Analytics
The bespoke sector rose by 20.19 per cent during 2016, compared with a 17.57 per cent gain for the MSCI India index.
Below FE Trustnet looks at some of the best performers over 2016.
Neptune India and Baring India
The best performing India-focused fund of 2016 was the Neptune India fund, which returned 24.61 per cent, closely followed by the Baring India fund, with a return of 24.06 per cent.
Over three years the £105.6m Neptune fund – overseen by Kunal Desai and assistant manager Ewan Thompson - has generated the better return, rising by 108.34 per cent to 30 January 2017. The $23.6m Baring fund managed by Ajay Arnal has returned 98.81 per cent in comparison.
Performance of funds vs MSCI India over 3yrs
Source: FE Analytics
So far this year, the Neptune fund is up by 4.42 per cent edging the benchmark's 4.14 per cent gain. The Barings fund is up by 3.81 per cent over the same period.
Neptune manager Desai noted in his outlook for the year ahead that 2017 could mark "a terrific entry point" following a recent correction in the markt caused by short term growth concerns following demonetisation policies pursued toward the end of last year by prime minister Narendra Modi.
“We believe investors shouldn't be overly concerned with the transient short-term growth downgrade but instead should focus on the longer-term transformative impact that this, and consequent, steps can have on the economy and fiscal strength,” he wrote.
“Such policies will increase transparency in the system, lowers transaction costs, reduces opportunities for rent seeking and improves the effectiveness of bureaucracy. This helps India’s long-term potential growth through a rise in productivity.”
The Neptune fund has an ongoing charge fee of 1.15 per cent, as of 30 June 2016.
Franklin India
The $3.2bn three crown-rated Franklin India fund, managed by Stephen Dover and Sukumar Rajah, also performed strongly during 2016.
The fund returned 22.94 per cent last year and has risen by 5.07 per cent in 2017 so far. Over three years the fund has also performed strongly, returning 108.24 per cent compare with a 66.44 per cent gain for the index.
The Luxembourg-domiciled Sicav has an OCF of 1.13 per cent.
The Franklin India fund is benchmarked against the MSCI India index and has an overweight position in financial stocks, which represents 33.74 per cent of the portfolio compared with a 20.86 per cent weighting for the index.
Performance of fund vs benchmark over 3yrs
Source: FE Analytics
Indeed, the fund’s top 10 holdings include several bank stocks including top holding HDFC Bank, as well as Kotak Mahindra Bank, Indusind Bank, State Bank of India and Yes Bank.
Jupiter India funds
FE Alpha Manager Avinash Vazirani is one of the industry’s best-known Indian equity specialists, having steered Jupiter’s offerings for the sector over a number of years.
Two Jupiter Indian-equity funds reside within the Investment Association universe: the onshore Jupiter India and the mirror offshore JGF Jupiter India Select funds.
The onshore fund carries a five crown rating and has returned 22.76 per cent over 2016 and has also been a strong performer over three years, having returned 136.18 per cent.
Writing in his outlook for 2017, Vazirani noted that the Indian economy was likely to experience some disruption following last year’s shock withdrawal of 500 and 1,000 rupee notes aimed at reducing levels of unaccounted for wealth.
He warned that despite the positive intentions, the implementation had caused some problems for the “predominantly cash economy”. The implementation of a goods & services tax is also likely to cause challenges for the economy as it is rolled out nationwide.
“Taken together, I believe the combination of cash de-monetisation and introduction of GST should significantly increase the government’s tax take and encourage movement to the formal economy,” he wrote.
“It will take a few months for these long term positive factors to develop, and in the meantime there will be some uncertainty.
Performance of fund vs benchmark over 3yrs
Source: FE Analytics
“There is unlikely to be any GDP growth for the next two quarters, as consumer spending slows down due to the lack of liquidity.”
However, Vazirani noted that the long-term prognosis for the economy and stock market in India “is still significantly positive”.