Investing in India

This week’s fund manager interview is with Stephen Hopley, the Executive Chairman of Jaipur Asset Management.

They’re a specialist Indian fund manager for Australian investors. It’s a fund of funds; it invests in three other funds that invest in India. 

Here’s Stephen Hopley, the Executive Chairman of Jaipur Asset Management.

Stephen, Jaipur Investment Management is a fund of funds specialising in India.


Could you just tell us how it works?  Which funds are you investing in?

Okay, basically we have chosen funds from three of the largest fund managers in India, the State Bank of India Funds Management which their international operation is a joint venture with Amundi and it’s a bit unusual but we have chosen a fund which focusses very much on the small to midcaps, so more than 50% of its exposure in that area, because our view is that much of the growth in India will come out of that particular sector of the market. 

Then to contrast with that we have a relationship with Birla, Birla are one of the two largest equities managers in India and we actually access that portfolio, it’s between $3 and $4 billion US.  There’s been quite a lot of movement in the market so a bit difficult for me to quote an exact figure.

Stephen, what do you mean access their portfolio?

Basically, the way we actually invest is our investors are designated by ASIC as professional investors, they invest through a fund which we have established in Australia, a master fund.  That master fund is in Australian Dollars and all our investors are actually quoted their unit prices in Australian Dollars.  Using a local custodian trustee we then invest in monthly into pools that are held in overseas environments, two of which are in Mauritius one of which is in Ireland.  The reason for that is very simple, is to ensure that Australian taxpayers pay Australian tax and by doing this sort of process we can make sure that we are not subject to short term taxes in any other environment.  We have selected managers that can do this for us.

From those pools that invest directly into equities in India in two cases they actually invest directly out of the pools which was Birla actually buys units in their very large pool in India itself.

I take it that when you invest directly into the equities it matches the portfolio of the manager you’ve chosen.

Yeah, the key element is to make sure that we access the skillsets of the people who are running the particular portfolios to which our clients are exposed.  This was the way that Birla’s structure works best for us.

Right, so I think I interrupted you before you got to the third one.

The third one is UTI.  By the way Birla has a joint relationship with Sun Life which is a large insurance company out of Canada.

It’s based in Singapore isn’t it?

Birla is actually based in India and Sun Life of Canada is their partner, and they’re definitely based in Canada.

Right, carry on, so number three is?

Then there is UTI International.  UTI International are based in Singapore, SBI’s international operation, you may be picking up their joint venture with SBI is actually partly based in Singapore and partly based in Dubai.  The guy who actually runs it actually moves between the two places.  Birla is definitely run out of India itself.

SBI is the one that’s small to midcaps and Birla is the large caps, and UTI?

UTI, their benchmark is actually the whole index but in reality they’re a very unusual group.  By the way, everybody we researched in India tells us that they are GARP managers.

What does that mean?

Growth at a reasonable price.


So, they were all the same but let me tell you when you actually review them as we did you find that they all do quite different things so that’s why we finished up with the structure we had.  The third manager, UTI, their partner is T. Rowe Price, their international operation for their whole thing is actually head office in Singapore but their pools are run out of Ireland.  It’s a complex business, this international investing.

It’s a bit hard to keep up with all this.

Well, that’s right.  That’s why we set up our structures so carefully.  Then you’ve got to comply also with the regulations in India and we have special regulations around non-resident Indians.  If you invest with us we ask you first are you an Australian taxpayer and then secondly are you are a non-resident Indian under Indian rules because they have very strong controls around non-resident Indians, as they classify them.  Third generation still counts and so it’s an interesting structure.

They’ve got a partnership with T. Rowe Price, the most interesting part about them and what attracted us to them is they focus on the companies that make up the index where the founders of those companies retain either control or a very large share holding and they focus not only on the founders themselves but their families and whether or not they believe they’ll be able to continue to provide the management structures, etcetera, that will drive successful companies.  The sort of companies, would be Tata, those sort of companies.

They are a very interesting section of the market in India and many international investors miss them because of the structures around free float and those sort of things, and the controls over their portfolios.  We consciously chose to go with them to get an exposure to those stocks.

Right, so take us through the fee structure, what do they charge you and then what do you charge?

They charge us directly a management fee and we pay those management fees ourselves.  We do not have a buy/sell spread, we actually absorb the currency transactions in our process as well and we guarantee a flat fee of 110 basis points, that’s 1.1%.

What do you mean you guarantee it, that’s what you charge?

That is what we charge in total and we absorb all the other fees ourselves.  There are no performance fees at all.

Right, is that because you don’t believe in them?

Don’t believe in performance fees.

Right, why not?

My experience with performance fees, I come from a house over 14 years with Macquarie in their investment divisions.  My experience with performance fees over the whole market is they collect them in good years but they don’t give them back to you when they have a bad year.  My personal belief, and this was the same with my partner when we set it up, was that performance fees are flawed in a long only fund and my belief is that the Australian market should be and already is moving to a lower fee structure that is relatively simple to forecast in advance what your fees are going to be.

Okay, are you prepared to tell us what your margin is?

Our margins are not substantial on that level.  We actually pay fees that are extremely competitive with our partners and I’m quite sure they would prefer us not to share those.

Fair enough.  Do you hedge at all?  How does the currency situation work?

No, our philosophical belief is one of the reasons for buying international funds, is to actually invest outside of Australia and you’re doing that in part on a belief that there is a risk in putting all of your money in Australia so therefore you should accept the currency risk that goes with it.

Right, therefore by investing in your funds people are taking a currency risk on the Rupee?

They are however because it’s so expensive to hedge the Australian Dollar against the Rupee our structure actually means that our intermediary funds are all designated in USD and what we will do is we will share the USD unit price with anybody who wants to hedge their international portfolios, it’s something we understand people do.  If they want to do that then the best way to hedge our fund would be to hedge it through the USD relationship.

Are your investors exposed to Rupee or USD?

In actual fact the underlying investment is all in rupees but because the intermediary funds are in USD and it is the USD/Rupee relationship that is more volatile than, of recent times anyway, the Australian Dollar Rupee relationship if people do want to hedge but no one has chosen to hedge at this stage.  We can offer that facility if people want that.

Can you tell us what the performance of your three funds has been?

The net performance over the two years was exceptional, the first two years we actually exceeded a 50% performance net to our investors in our first two years of operation however in the last two months especially there has been a substantial fall in the Indian market and our fund has come down approximately 20% over that period of time which is basically the fall in the Indian market over that period.  Our investors are still profiting but not as much as they were previously.

You’d probably say India is a buy now, would you?

I’ve prepared a little bit of information for you and in that I was going to give you what are the challenges for the short term that we see as well as what are the key opportunities and why we still see India was one of the great opportunities in all markets around the world.

Okay, let’s hear the challenges.

Well, the challenges are very specific, the first one is political.  There have been three recent elections where the BJP, that’s Modi’s party, has been challenged directly and they’ve lost power in some states.  There are five over the next month, the election results will be announced on the 11th of December.  The largest of those that they are likely to lose is Rajasthan which as it happens is the state where Jaipur is.  We expect that they will most probably lose that state, we’re not sure about the others.  What that will do is give a bit more volatility to the market until those results are out and they’re interpreted what it will mean for the national elections which are going to be held next year.

That’s the first thing, that obviously will present some challenges.  Our contacts in India tell us that a number of the corporates would actually be quite happy to see less change over the next five years after the change they’ve had in the last four and a half.  Most of the change has been beneficial but they’d like time to get down their systems and things to make it work more easily I’m sure.  That’s the first one.

The second one as in most countries worldwide these days is still corruption.  In India however, the key elements are the way the government has attacked those.  The two that you may not be aware of is that they changed the Bankruptcy Act.  Most of the state owned banks, and there’s lots of them in India, were influenced by politicians to lend to entities, building infrastructure or just normal corporates that were actually going to come to the local state.

However, the bankruptcy laws meant that non-performing assets weren’t called in and the interest and the capital didn’t get repaid so that was not very good as you can imagine.  The government has changed those laws, not only did they change them to ensure that the banks could actually act to collect their interest and if necessary take charge of the assets.  They actually empowered the Reserve Bank of India with the capability of directing the banks to take action and around which assets they would take action.

The outcome of that has been that a couple of infrastructure assets including one of the largest mobile phone companies in the country have changed hands in the last 12 months so that the original owners could repay the debt.  On the other side of it there’s been the effective collapse of the largest infrastructure fund in India, it’s called the IFLST I think.  The key thing to it is, Alan, you know how we went here basically when we started constructing infrastructure assets within the PPP structures?


And most of them they got the pricing on the underlying structures incorrect and quite often those assets had to be sold to someone else and repaid some of the debt so that many institutions then started investing directly but in pre-existing assets rather than new ones.  This is exactly the same problem in India, constructing assets they got the pricing wrong.  What that will mean is many of the assets will now be sold for less than book value, no one is quite sure how it’s going to work.  The government said they’re not going to bail the fund out which is what would have happened previously.  This is fairly recent, it actually happened in September, it’s one of the major causes of the collapse in the markets in India because no one is quite sure what’s going to happen over this one.

The other one is that the Reserve Bank of India is required to endorse the employment of a CEO of a bank over there, private banks as well as state ones, and they’ve just refused to endorse this re-employment of the CEO of Yes Bank.  That’s meant that Yes Bank’s share price has tanked over 30% and so as you can imagine that’s had a fairly dramatic impact on financials so you put the two of them together, the market has come back dramatically.

The other is oil price, India imports most of its oil, a lot of it comes from Iran however they don’t have many exports and they’re mainly services so the dispute between US and Iran is less likely to have a major impact on India but the oil price will.  The only other thing which has turned out not to be as bad this time around as in previous times, there’s always been a volatility factor on the withdrawal of direct foreign investment from India so an opportunity turns up in America, the institutions pull their money out and so that’s always had an impact in the Indian stock market.

They have changed the rules with regard to allowing pension funds in India to invest in equities, that together with the increase in the savings capacity in the country has meant there’s been less volatility in months when there’s been negative foreign investment.  That one seems to have gone away to a large degree but they’re the main risks we see in the Indian economy.  The drivers in our view outweigh them dramatically.

Okay, we’ve got about five minutes left, tell us about the long-term positives about India in your view?

The positives are demographics, 25 million new Indians born every year, average age 27, relatively well educated for a developing country.  I think their number of university graduates is now greater than the population of America and as we know they’re extremely smart especially in IT areas.  The figures on that are quite amazing.  Obviously English is the language of choice there for most educated people and all the regulatory environments are basically British originally and English is still the language for those. 

The other thing that’s going to drive the economy has been the focus on the poor.  They’ve changed a whole stack of stuff, they now have ID cards and that’s meant that the poor can have bank accounts which means they’re now paid subsidies on commodities that were able to be, if you like, very corrupt in the way they were distributed, now are paid direct to the poor which has helped them quite amazingly.  They’re using their savings in lots of areas to employ the poor to do things like build roads, they’re improving sanitation, a whole stack of that. 

Education is improving, they’ve got retention levels for girls are going up which if they can achieve that it will increase their educated pool dramatically yet again because that’s been one of the biggest failures of their education system in the poor areas, girls were leaving as they reached puberty.  They’re now addressing that situation.  That will change stuff.  There’s a prediction, these are the figures that we received this week, there’s a prediction that the growth in the Nifty Fifty, which is the top end of the market, that the growth in profits for 2019 will be 14% and in 2020 the growth in profit of the companies in the Nifty Fifty will reach 20%.

If you put that together with the increase in consumption internally their GDP is about 81% or 82% internal and 18% exports.  If you look at the increase in consumption for instance they now, in the third quarter of this year more smartphones were purchased in India than were purchased in America so they’re now the second biggest market in the world.  They ran out of whitegoods at one section during the last 12 months and they now sell more cars internally than China does.  Consumption on all sorts of things is rising dramatically which is just their structure, they build their own things for themselves.  It just means that they’re driving their economy, in our view, dramatically.

That together with the GST, the interesting thing about the introduction of the GST in India is it has had an immediate impact on their ability to move goods around the country because what they used to have was state based taxes and it could take you up to two hours to cross the border.  All that went away with the national GST.  It’s meant that to ship goods around the country is suddenly becoming a realistic thing and the amount of money that they’re spending on infrastructure is absolutely astonishing.  That’s why we think that India is going to be the greatest opportunity that there is.

There’s a fantastic set of figures that came out from one of the major institutions over there and they’ve used the IMF’s figures out of India for 2016, they have taken PWC’s predictions of growth around the world and the graph shows where the US, China and Europe sit with regard to growth factors today and where the percentage of the world GDP is.  You apply the growth factors through to 2030 and what you actually find is that US and Europe go down quite dramatically and China goes from 18% to 20% and India goes from 7% to 15% share of the world GDP.  The growth factors that are being predicted by the international institutions are just astonishing.

We just think that Australians, especially our professional investors and our institutions, are going to need exposure to India.

That was Stephen Hopley, the Executive Chairman of Jaipur Asset Management.