Mumbai: With India’s benchmark stock indices, the Bombay Stock Exchange’s Sensex and the National Stock Exchange’s S&P CNX Nifty hitting all time highs last week, many of the smaller foreign institutional investors who have only just begun to invest in India are changing their investment strategy.
Instead of investing in traditional, managed portfolio services provided by large wealth management firms such as Morgan Stanley or UBS, they are now seeking diversification in portfolio strategies, investment managers and even asset classes. And some of the firms are even looking to invest in absolute return-oriented hedge funds whose investment strategies are designed to make money regardless of whether the market rises or falls.
“In the past three years, almost anything you bought went up but going forward it’s not clear what will do well from a macro perspective,” says Robert Rahbari, managing director of RAS Capital Management. A recent report by Citigroup says that in 2006, the appropriate country mix (or how much a fund invested in each country) was more important than getting sector exposure (how much the fund invested in various investment types) right. In 2007, things are different in a market where the downside risk may appear more significant than the upside risk and overseas investors are beginning to change strategy.
This has also seen the emergence of a new type of fund—country-dedicated fund of funds. RAS Capital claims to have launched the first India dedicated fund of funds aimed at investors looking at risk adjusted returns.
The scheme aims to remove the complexity of choosing between an estimated 96 India dedicated funds (FIIs, hedge funds, and others) that collectively manage almost $20 billion (Rs80,800 crore) of assets.
The RAS India fund of funds also aims to diversify between schemes which invest in stocks of small cap and large cap companies and also across asset classes such as distressed debt, derivatives, and arbitrage.
Meanwhile, some investors who helped India record net inflows of $1.7 billion in the week ended 11 July have also begun seeking out private equity funds.
Many of the new foreign institutional investors investing in India for the first time are smaller family offices in the US or Europe which have relatively smaller amounts of money they wish to invest.
As compared with large investment management firms such as Fidelity which are in the business of raising and managing money from third party investors for a fee, family offices are set up to professionally manage the wealth of rich individuals and families who wish to maximize returns for a given level of risk.
“India has now begun to receive flows from a diversified mix of investors...,” says Ridham Desai, managing director, Morgan Stanley Securities Pvt. Ltd.
Fund marketers say that managers of US and European family offices have typically had few investments in India but given the Indian economy’s growth over the past few years, they would now like to allocate a small percentage of their investments to India.
In the initial stage, most of these investors seek to deploy small amounts of capital as a test case before they commit any serious money. As a result, they find themselves investing in one or two funds, which typically require minimum investments of $1 million or so, say experts.
But with the BSE Sensex already over the 15,000 mark, several first time investors are becoming wary of a capital loss.
Domestic brokerage Motilal Oswal Securities Ltd too has a one-year Sensex target of 16,500 points. On Monday, the benchmark indicator closed at 15,311, up 38.5 points.
RAS hopes to tap this market. Meanwhile, it is also busy diversifying its portfolio across funds and fund managers.
“To select the fund managers we should invest in, we have even set up an India office. We will soon add another two to three fund managers to our bouquet of nine odd managers whom we currently invest with,” says Anand Sekaran, the New York-based managing director of RAS Capital.
Sekaran says that while India accounts for 2% of global market capitalization, it accounts for 8% of world output. He adds that an adjustment between the two is inevitable, but says that the days of easy money are over.
“Demand for our RAS India fund of funds is strong as this year the scheme has already clocked 20% returns (in the first eight months of operation) net of all fees to investors,” says Sekaran.