Fund in Focus: First State spreads risk of investments across Indian subcontinent

Published on Friday 18 September 2009 19:37

THE Investment Management Association's specialist sector contains a mind-boggling variety of funds. Property, commodities and specialist equity funds sit somewhat uncomfortably side by side.

One of the more interesting constituents is the First State Indian subcontinent fund run by David Gait.

The investment credentials of this region may be a mystery to some, but, as Gait pointed out, many companies have large stakes in the hands of "promoters" and are run as large family businesses.

"They aren't so interested in next quarter's profit figures and focus on the long term," said Gait. "Companies also have to deal in areas with high levels of poverty, and in general they are more interested in what the monsoon season will bring than what is happening on Main Street, USA."

The fund invests in companies across the size spectrum with no constraints on taking significant positions against its benchmark, the MSCI India index.

"We start with a blank piece of paper and view risk as the chance of losing money for our investors, rather than the portfolio's divergence from the index.

"I'd call it an all-cap fund, as we own both large and small companies. That said, we do struggle to get comfortable with the corporate governance of some of the very largest private and government-backed companies," added Gait.

He believes the long-term growth drivers in the region are different from those in western economies.

He said: "India did not have the same level of indebtedness, but has had a real-estate bubble. The banks were not caught up in this, so have not been as badly affected as western banks."

But he noted that, on the down side, the Indian government needs to borrow over 10 per cent of GDP. "The tax take is low and hopefully it can grow its way out of this problem."

One of the most innovative companies in the portfolio is Dabur, as First State's senior analyst for the region, Sashi Reddy, explained: "A lot of the population do not have the means to afford toothbrushes and toothpaste, so Dabur came up with the idea of using tooth powder, which is applied with your finger."

Another good example is Marico, which produces refined coconut oil. This can be used both as hair oil and for cooking, and its innovative packaging helped it to appeal to a wider audience, thus boosting revenue.

Reddy believes both companies will be big in Africa, as they have proved they can adapt to the social differences in these markets.

&#149 For more information call 0800 587 4141 or visit www.firststate.co.uk

&#149 Barry O'Neill is a chartered financial planner with Thomson Shepherd Limited (incorporating Coggans Wood).