The Hindu Business Line : ‘Investors may look for better entry points to India story’

Mercer, one of the world’s largest investment advisory firms, has recently flagged off this business in India. Its plans include researching Indian firms in a range of asset classes- listed equities, private equity, real estate and infrastructure. Mercer’s global investment consulting business provides services to more than 2,750 clients with assets of over $3.5 trillion, in 35 countries. Business Line interviewed Ms Rashmi Mehrotra, Head of Mercer’s Retail Services for the Asia Pacific region, for her take on where Indian stocks are poised now markets and the outlook for assets such as gold and property.

Aarati Krishnan

As a global investment advisor, have you seen a rising risk aversion on the part of investors, as a fallout of the US sub-prime crisis? Are the lower PE multiples for these riskier markets, here to stay?

We believe emerging markets provide good medium- to long-term potential for growth based on demographics, GDP growth and the maturing of stock markets. There continue to be risks in investing in these markets, usually reflected in lower PE multiples. The markets have generally been sanguine about these risks of late, and have corrected. The longer term PE multiples are a function of how global investors see the risks diminishing over time.

With investors in a more cautious mood, will “value” oriented strategies to select stocks, which haven’t delivered in recent years, start to perform once again at a global level? Will a “value” style come back into vogue in India?

The ‘value/growth’ distinction for global investors is usually for within developed equities markets. So, there are value/growth cycles within US stocks. Investors, especially institutional investors, don’t tend to be growth or value investors; they have investments in both. India is seen as part of the emerging market equities asset class and the long-term allocations to emerging markets are slowly rising.

Do Indian equities as an asset class, remain appealing to long-term investors, after their exceptional returns over the past four years?

As with any investment, the valuation at market entry determines the final returns to the investor. So, while long term investors find the India story appealing, they will look for better entry points.

For an Indian investor who has the bulk of his portfolio in Indian equities, does it make more sense to diversify overseas?

Diversification is the only free lunch going. Investors should diversify as much as possible. Usually, the correlations across asset classes are lower than they are within equities. So, it is possible that the Indian equities market follows overseas equities markets.

Hence, it makes sense to diversify across asset classes, including equities, debt, real estate, gold, commodities, infrastructure (unlisted) and private equity.

The Indian mutual fund industry is seeing a large number of new entrants and schemes. Given that very few of the Indian funds have a long track record, how would you assess equity funds from an advisory perspective?

Firstly, we don’t look at track records. Ten-year track records are meaningless anyway since portfolio managers change, processes change, competitors change, markets change. In fact, our studies of other markets show that the longer the track records, the worse the subsequent out performance. In other words the conclusion was ‘hire firms you’ve never heard of and fire them as soon as they become famous’.

Our process is qualitative and forward looking. We try to look for competitive advantages in a firm’s people and processes. We also try to focus on any disadvantages and try to understand the environments in which the firm may not perform well.

Secondly, on the issue of multiplicity of schemes due to NFOs, we have an easy way to sorting through and focusing on a firm’s capabilities in an asset class rather than rating individual schemes, which have very little differences or restrict the manager’s ability to demonstrate skill. So, we exclude any schemes that focus on sectors or themes, a particular size (large/mid/small cap), or alleged style (contrarian/value), which is different from the house style.

Indians typically tend to allocate a very large proportion of their assets to investments in property. What will be your approach to the Indian property market?

Indians are not unique in investing a large proportion to direct property; investors in developed markets also have a love affair with the property, which is understandable. Unfortunately, because homes are also used for consumption, people forget to apply to the same investment principles to property as they would to other investments.

The approach to property investing should be the same — calculate net cash flows and valuations. Then compare the return available to other investments with similar risks. So, the risk in property could be that rents don’t increase as much as expected, the demand/supply equation changes affecting the capital value, market values in that location drop due to external factors etc.

Given the low investment returns from gold over a 10-year period, would you advocate an allocation to gold in the portfolio? What route should Indian investors take for investing in gold?

Gold is a good diversifier for most portfolios, especially in times of uncertainty. In the end, it comes down to the investors’ outlook, objectives, risk profile and time horizons. In terms of vehicles, bullion exposure is the purest.

Investors could consider derivatives as well. Other vehicles such as ETFs may be affected by equity market volatility, while shares of gold mining companies have the added complication that they may have actually hedged their gold price exposure.

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