New York: Seth Freeman says he’s been “eating, sleeping and thinking India”, probably more than most Indians themselves do. That’s because he manages the EM Capital India Gateway fund based out of the US. The fund, which has been around since 2007, had a harrowing year in 2008, falling by 70%-plus, but made a drastic turnaround and returned 144%-plus in the year ended 31 March. A small fund with just under $300,000 (Rs1.3 crore) in assets, it invests 50% in small and mid-cap Indian companies. Freeman, an American based in San Francisco, spoke in an interview about which sectors he’s bullish on and why foreign institutional investors (FIIs) could make large-cap stocks more volatile. Edited excerpts:
What’s your investment strategy? How were you able to beat the indices?
Frankly, we held on to stocks that went down very badly in 2008. We remained disciplined. Back then it didn’t feel much like discipline as much as it did stupid. But we did not aggressively sell and we grit our teeth and took a lot of antacid pills for our stomachs and watched many of our holdings absolutely plummet. But we knew the share prices of otherwise sound companies would pop up once the global storm subsided. So essentially many of the same small-to-mid-cap stocks and large-caps, too, that really got hammered, recovered very strongly.
Photo: Shyamal Banerjee/Mint
2008 was a bad year for many funds, but your fund saw an exceptionally large drop. Why?
We did worse than many funds for a number of reasons. We didn’t go into cash as many funds did when things went bad. We are also invested in small- and mid-cap companies that can be much more volatile than larger companies. The fund was just trying to get traction in 2008, then Lehman Brothers blew up in October and we got a lot of redemptions. We were forced to sell some good companies at a time when it would have been much nicer to be a buyer than a seller. But we had to sell to cover the redemptions. However, we remained confident in our approach and have a very long-term view.
It was depressing, having started the fund at a time when external factors and things going on around the world that had nothing to do with the quality and valuation of Indian companies, with problems stemming mainly from problems in the US and England. We were out there promoting India and quite confident that our approach was a good one, but we were stymied by external events. All we could do was wait.
There’s a lot of talk on the Indian market being overvalued. Do you think so?
Usually what is being looked at by those asserting the market is overvalued are the major indices and metrics such as aggregate price-to-earnings ratio of the Nifty or the Sensex. But we are not investing in an index or the “market”. We are prudently investing in specific Indian companies that we believe are undervalued and provide our investors the opportunity to achieve superior returns from those companies’ future growth and profits. With diligence, research and networking you can find attractive Indian companies that are undervalued and have substantial growth prospects.
What are some of your favourite stocks?
Some of the companies we own a lot of people may not have heard of, especially in the US. One is Magma FinCorp Ltd, a non-bank finance company with rural offices all around India financing tractors and trucks for small operators and cars.
We also like Nilkamal Plastics (Ltd) that makes low-end plastic furniture and pallets, Rajesh Exports (Ltd), the world’s largest gold jewellery manufacturer, and Financial Technologies India (Ltd), a global company creating new regulated stock, commodities and derivatives exchanges in India, Middle East and Africa.
Which sectors are you bullish on?
On all sectors really. We expect growth to be relatively big compared to the rest of the world and it will continue to be a domestic consumption growth story. I like domestic FMCG (fast-moving consumer goods) companies like Marico (Ltd) and Dabur (India Ltd). There are just so many people who have to buy things. We’re also very bullish on pharmaceutical companies and health sciences companies. Right now there’s a shift that’s happening much faster than predicted. There’s lots of innovation going on in India. They’re not just processing or following designs that were made in the US. Who would have imagined that the largest steel company would be owned by an Indian company or that an Indian car company would own Jaguar? As far as I’m concerned, these Indian companies are just warming up.
What’s your view on how Indian markets could perform relative to other markets if the debt problems in the EU persist?
It’s unbelievable that the cost of insuring a sovereign bond in Greece is now higher than a sovereign bond from Pakistan. The concern is that people may just view emerging markets generally as riskier. Most investors acknowledge that most emerging markets will have higher growth rates than developed markets for quite some time. The concerns are more along the lines of inflation and currency risk and being exposed to a currency that might get devalued. It just makes investors nervous. Even if the EU fell apart I don’t think it would have an enormous impact on India other than it could cause some short-term chaos and maybe revenue from European countries or companies could be disrupted for a while, but not for the long term. I don’t think the companies or countries that have demand for Indian products or invest in India would change their views on India even if Greece completely defaulted.
I think there are larger problems in Portugal and Spain.
As a non-Indian, how do you trade in a market that is largely driven by sentiment?
There are good underlying fundamentals, but sentiment plays a big role. But shareholding pattern also affects the stocks. FIIs can make a company’s stock more volatile. In the case of the global meltdown period, you had global funds and fund managers pulling out of India, which pulled down stock prices. So sometimes a company that has more FII ownership is made more volatile. Some of the small- and mid-cap companies that don’t have a lot of FII ownership can actually have less volatility and don’t get jerked around by foreign investors. Certainly, you have to make tough decisions based on market fundamentals. But in a country like India you also have to understand sentiment and what’s driving a company, who’s driving the company and also what’s driving the stock price movement.
That’s where having an understanding of the local markets and our in-country resources and relationships are very important.