The years of corporate scandals in India have honed the skills of the country’s fund managers in stock picking to such an extent that they can now consistently beat the choices of foreign peers and retail investors.
According to data compiled by Bloomberg, an equally weighted basket of Indian stocks with high participation in domestic mutual funds and low foreign participation has outperformed a basket with the opposite profile over the past two years. Local fund managers have become more adept at using their knowledge of business, government and the economic climate to avoid pitfalls.
“Experience with past governance issues shows that domestic mutual funds have avoided investment in explosions better than their offshore peers,” said Nitin Chanduka, analyst at Bloomberg Intelligence. Local funds are also more exposed than foreigners to mid and small caps, which have generated gains in India since 2019, he added.
The choices of domestic fund managers were also better bets than those of Indian retail investors, whose ranks swelled during the pandemic. High Indian stocks in mutual funds have grown at a compound annual growth rate of 16% over the past 12 years, compared to 11% for stocks with high foreign participation and 13% for those with high foreign participation. individual investors.
Historical analysis by Chanduka and Gaurav Patankar of Bloomberg Intelligence shows that local professionals have smaller stakes in companies that have reported governance issues than foreign and individual investors.
Part of this gap in the assets of troubled companies is explained by the fact that domestic funds are still less present than foreign funds on the whole. Local institutions hold a combined stake of more than 25% in only 45 of the stocks in the Nifty 200 index, compared to 145 stocks with this level of ownership by foreign funds.
Yet the better performance of Indian managers’ choices demonstrates that local knowledge can be lucrative.
“Companies whose stocks have a high stake among domestic funds lead those with low holdings, so taking this factor into account can generate better risk-adjusted returns,” said Chanduka of Bloomberg Intelligence.