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Scandal-Weary Indian Fund Managers Outperform Foreign Rivals

Local fund managers have become more adept at using knowledge of companies, the government and economic climate to avoid pitfalls.

Scandal-Weary Indian Fund Managers Outperform Foreign Rivals
Traders work on the trading floor of the Motilal Oswal Financial Services Ltd. office. (Photographer: Vivek Prakash/Bloomberg)

India’s years of corporate scandals have honed the stock-picking skills of the nation’s fund managers to a point where they can now consistently beat the choices of foreign peers and retail investors.

An equal-weighted basket of Indian stocks with high domestic mutual-fund ownership and low foreign ownership has been outperforming a basket with the reverse profile over the past two years, according to data compiled by Bloomberg. Local fund managers have become more adept at using knowledge of the companies, the government and economic climate to avoiding pitfalls.

“Experience with past governance issues shows that domestic mutual funds have skirted investing in blowups better than offshore peers,” said Nitin Chanduka, an analyst with Bloomberg Intelligence. Local funds also have more exposure than foreigners to mid- and small-caps, which have driven gains in India since 2019, he added. The S&P BSE Small Cap Index is up 92% since the end of 2019, beating the 33% gain in the broader S&P BSE Sensex.

Scandal-Weary Indian Fund Managers Outperform Foreign Rivals

Domestic fund managers’ picks have also been better bets than those of India’s retail investors, whose ranks have swelled during the pandemic. Stocks with high Indian mutual-fund ownership have risen at a compound annual growth rate of 16% over the past 12 years, compared with 11% for stocks with high foreign ownership and 13% for those with high retail investor stakes.

Scandal-Weary Indian Fund Managers Outperform Foreign Rivals

Historical analysis by Chanduka and Gaurav Patankar at Bloomberg Intelligence shows local pros have had smaller holdings in companies that reported governance issues than overseas and individual investors.

Company

Date of disclosure

of corporate

governance

issue

Pre-event

onshore

mutual-fund

holding (%)

Pre-event

foreign

investor

holding (%)

Pre-event

individual

investor

holding (%)

Cox & KingsAug. 201907710
Indiabulls Housing FinanceJuly 20194706
Dewan Housing Finance*Jan. 201953023
Zee LearnJan. 201905726
Yes BankNov. 2018145311
Manpasand Beverages*May 201821395
PC JewellerApril 20182778
VakrangeeFeb. 201803515
Gitanjali Gems*Feb. 20180843
Tree House EducationDec. 201601535
Note: Holdings given as % of free float, 6-12 months pre-event; *trading suspended
Source: Bloomberg Intelligence

Part of this discrepancy in holdings of troubled companies is due to the fact that domestic funds are still a smaller presence than foreign funds overall. Local institutions hold a combined stake of more than 25% in just 45 of the Nifty 200 Index stocks, compared with 145 stocks with that level of holding by foreign funds.

Still, the better performance of the Indian managers’ picks demonstrates local knowledge can be lucrative.

“Companies whose shares have a high stake among domestic funds lead those with low stakes, so accounting for this factor can generate better risk-adjusted returns,” said Chanduka of Bloomberg Intelligence.

©2021 Bloomberg L.P.