India is crowded with a plethora of investment funds. They include a wide range of equity mutual funds offered by nearly four dozen investment management groups — among them, domestic outfits such as Reliance Capital and UTI Asset Management Co., foreign heavyweights like Franklin Templeton Asset Management and joint ventures such as DSP BlackRock Investment Managers. In addition, private equity funds established by the likes of Carlyle Group, Kohlberg Kravis Roberts & Co. and Warburg Pincus are actively scouring the country for deals, as are venture funds created by Draper Fisher Jurvetson, Kleiner Perkins Caufield & Byers and Sequoia Capital. Virtually all of these investors are focusing on the 6,000 or so Indian companies that are publicly traded, as well as another group of closely held businesses that are ready to go public or be acquired.
[To view the complete list of winning firms, along with the full roster of ranked teams, go to the 2011 Emerging-Markets Equity & Fixed-Income Research Team.]
Notwithstanding all the competition, the Indian market is inefficient, especially when it comes to small and midcap companies. Most of these businesses are controlled by insiders — management, family and friends — and there is a glaring lack of transparency. “That’s where our advantage is,” says Hiren Ved, chief investment officer for Alchemy Capital Management, a Mumbai-based equity fund firm that manages nearly $400 million in assets, a quarter of it for international investors.
Alchemy’s sweet spot is a large but relatively illiquid part of the broader market where research coverage is spotty at best. “Our strength has been in identifying companies that are under the radar for most stock pickers and sticking with them through their development and growth,” Ved says. “It’s about exploiting the inefficiencies of the market.”
Alchemy likes to maintain a small portfolio. Its roster of holdings never exceeds two dozen or so companies. The firm conducts extensive research on each of the companies it invests in and maintains steady contact with them. “It’s the kind of work that you can do only if you are local,” says Ved. Most important, Alchemy is a long-term investor. It typically holds on to a stock for years — sometimes as long as five years.
The firm’s old-fashioned strategy has paid off for investors. In the eight years of its operation, Alchemy has generated average annual returns of 35.2 percent, well above the average gains of 22.7 percent for the benchmark Bombay Stock Exchange’s Sensex and 24.7 percent for the wider BSE 500 index.
The Indian market is no different from other emerging-markets stock exchanges. It’s easy to go public, but then the bifurcation begins. Only a handful of companies make it beyond the early stages. Investors have a difficult time sorting out the real contenders from the wannabes — a major reason foreign investors have tended to focus on a small number of large-cap stocks. But the very nature of the market enables knowledgeable local managers to generate returns with savvy stock selection.
“The opportunities are with a slew of new entrepreneurial companies and new ideas that have a more-local character and where the payout is longer-term,” Ved says.
