Fund Update: HSBC GIF Indian Equity AD USD

Investment Universe, Process, Strategy and Benchmark – How does the Fund Manager invest? (ISIN: LU0066902890)

Focussed Research:
We consider valuations in both absolute and relative terms at time of considering it for investment. We do screen stocks based on profitability v/s valuation frame work and our effective stock universe is about 250 securities, as mentioned earlier. (200-250 stocks is the range, as some companies may move in and out of the effective universe due to market cap or liquidity reasons).

The investment team focus their research efforts only on those stocks that have been identified as eligible purchase by our preliminary quantitative and qualitative screening process.

Investment team would be meeting most company managements or interacting with them through a conference call before investing as a process, though it is not mandatory this process is regularly followed. We conduct field research as part of our investment process. The Indian Equity Team makes around 15 trips to India each year, each lasting up to a week. Indian companies are increasingly globalised so we also visit facilities and operations of Indian companies in other countries, including the US, Australia, Indonesia etc. We meet senior company executives (CEO, COO, CFO, etc.) in Singapore on a regular basis.
Between the portfolio managers and the analysts, the team covers around 200-250 companies. We meet all our portfolio companies regularly. Our total number of meetings in a year would average over 180. 

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Decision Triggers:
At the stock level, to consider buying a stock, the following elements should be in place:

• Right management along with defined strategy to deliver return on capital, cash flows and earnings;
• The company’s sector has expected positive macro-economics influences;
• The stock has growth potential relative to industry and exhibits sustainable competitive advantage and ability to generate value relative to other stocks in the same sector;
• The stock has favourable relative valuation levels and favourable trend in corporate governance.
• Timing is difficult to achieve, and it is not something we seek to achieve for each security. We have a philosophy of trimming on sharp upmoves and adding on sharp downmoves. This enables us to use the market volatility to exit/sell high, and to buy low.

Sizing:
Having identified stocks that we would look to invest in, we assess an appropriate position size relative to the benchmark. Our objective is to balance our fundamental view on the stock, with the contribution of the stock to the portfolio’s overall all risk and return profile.

The size of the position will depend on:

• Our fair value target
• Strength of our conviction on the stock
• Upside potential on the stock
• Our qualitative risk assessment

The output of this process is the client portfolio.

Sell discipline:
Stocks will be reviewed with a view to sale when:

• The company is trading above the top of our analyst’s assessment of its fair value range;
• The outlook for the key drivers turns negative, a signpost that earnings will come under pressure;
• A more attractive investment opportunity is identified;
• There is a change to management strategy;
• A major sale of assets or divisions has occurred;
• There is an unexpected structural change to an industry in which the company is involved;
• There has been a change in corporate governance, in operational efficiencies or/and competitive advantage.

The Indian Equity team actively manages all portfolios, so at the portfolio level no standard stop-loss procedures are employed, but rather monitored on an ongoing basis.
We would be willing to wait several years as long term secular plays work over multiple years. Our aim is to outperform over a 3-year rolling period, and that will be the horizon we think of when entering a stock, or keeping an underperforming stock.

Performance Review 2005

Performance Review 2006

Performance Review 2007

Performance Review 2008

Performance Review 2009

Performance Review 2010

Sanjiv Duggal: "The Indian markets rose 19.80% in 2010, on top of 90%+ return for 2009. In the Emerging Markets context, India was the ninth best-performing country in 2010. Market performance was influenced by Foreign Institutional Investor (FII) buying, as India witnessed record inflows of US$29 bn for the year, more than 60% over the previous record year of 2009. In contrast, the local institutions were net sellers. Most of the FII buying was of banks and other large companies, which have a big weight in the index.

The fund did not do well in 2010, returning 14.89% (source: FactSet), trailing the index by 4.91%. We held very few of the banking and industrials stocks, which saw a lot of foreign buying and rose sharply on the back of that. We were cautious on the valuation of some of these stocks, as they seemed to be driven by flows rather than fundamentals."

Performance Review 2011

Sanjiv Duggal: "Market participants gravitated towards ´comfort´ stocks in 2011 which tended to be expensive stocks on most parameters.  We were underweight expensive stocks - this hurt performance in 2011.

Inflation remained high for longer than we expected leading to higher than expected interest rate hikes and a slowing economy.  Along with the other points made, this led to our move into domestic cyclicals being a bit early - banks underperformed as rates went up, the economy slowed, leading to rising bad debt concerns.

We did not anticipate the level of inaction on the part of the government in terms of new infrastructure projects.  Further, we did not anticipate the government machinery putting some existing projects on hold for longer than anticipated. This adversely affected some of our commodity/metal, utility and infrastructure plays.  One of our real estate holdings got caught up in the alleged 2G spectrum issue and corrected extremely sharply relative to market.  Our key defensive stocks also underperformed, due to poor stock picking."

Performance 2012 - Year-to-Date

 
Sanjiv Duggal: "We have been positioned for monetary easing in India, as that is what our top-down analysis was indicating to us. We favour domestic cyclicals, as this segment offers exposure to the strong growth story in India, while being less sensitive to distant global shocks (Eurozone debt crisis, etc.). 
We stuck to our process despite the market turmoil in 2011."

Performance since 2007

Sanjiv Duggal: "Over the last 5 calendar years, overweight in Materials was the largest positive contributor to performance, helped by stock picking (Jindal Steel & Power was a key pick for the fund).

The biggest detractor of performance at the sector level was an underweight in Financials. In 2010 and 2011, we had been underweight the expensive private sector banks on account of expensive valuation for those names. Our exposure in select Real Estate names (such as Unitech) helped us in 2009, but hurt performance in 2010 and 2011, due to stock specific issues.

Looking at year-wise returns:
In 2007, the fund outperformed the benchmark by 1.62% (Quartile 1)
In 2008, the fund underperformed the benchmark by 6.31% (Quartile 1 in 1H, Quartile 4 in 2H)
In 2009, the fund outperformed the benchmark by 41.09% (Quartile 1)
In 2010, the fund underperformed the benchmark by 5.01% (Quartile 4)
In 2011, the fund underperformed the benchmark by 7.53% (Quartile 4)
(In 2012 YTD, the fund outperformed the benchmark by 5.68% (as of Jan 27, 2012) (Quartile 1))
(Return figures are from FactSet).