The Hindu Business Line : ‘Our biggest problem is an acute home country bias’

While it is wonderful to believe that India is shining, and so on, you have to distinguish between the fundamentals and real state of the markets. If the economy is moving in one direction, the markets need not necessarily follow. That requires you to diversify.

VINEET K. VOHRA, MD & CEO, ING INVESTMENT MANAGEMENT INDIA

Aarati Krishnan

You usually expect the CEO of an Indian mutual fund to be a staunch advocate of the ‘India story’. But Vineet Vohra, Managing Director & CEO of ING Investment Management India, argues that Indian investors may actually be assuming too much risk by placing all their bets on domestic stocks and India-specific equity funds.

Offering the view that markets such as the US may now be more attractive than India, he makes a compelling case for investors to diversify overseas and consider taking exposure to asset classes such as real estate, to trim the risk on their portfolio.

Excerpts from the interview:

After so many new fund offers, investors now have access to a wide range of minutely differentiated equity funds. What is the way forward on new products?

I think our biggest problem today is that investors suffer from an acute home-country bias. This is probably because our markets were closed to overseas investments for so long and have only recently opened up.

But investors have to recognise that global influences are now strong, whether it is the price of oil, gold, rice, or any other commodity.

Even employee salaries and stock valuations are subject to global factors.

I would think if there is one factor that can bring the Indian investment industry to its knees; it’s our extreme local concentration. While it is wonderful to believe that India is shining, and so on, you have to distinguish between the fundamentals and real state of the markets.

Markets are driven by sentiment and we must realise that they move in cycles. If the economy is moving in one direction, markets need not necessarily follow. That requires you to diversify your investments. We think lack of this awareness is driving the home-country bias.

ING has started to align its business in this direction. We are looking at bringing widest and broadest possible array of our global products to India. We have already brought our global real estate fund to Indian investors.

Shortly, we plan to launch a Latin American equity product under our single manager business and a global commodities fund under the multi-manager business.

By June, we plan to have a comprehensive investment portfolio of global/domestic funds covering the entire gamut of asset classes and geographies.

Given that only 3-4 per cent of investor portfolios are invested in stocks, is there a need to diversify overseas within that?

Investors get into equities to achieve a certain outcome — to beat inflation, get better returns than cash, and so on. But if that outcome isn’t achieved, the aim to invest in equity goes for a toss.

That objective is at risk if you don’t diversify. You don’t have to worry about all this if you’re running a closed economy. But we have opened up the economy and the winds are blowing in!

Yes, today, if you want to build a global portfolio of stocks, you should be overweight on India relative to its GDP, but definitely should not put 100 per cent in India.

To cite a global parallel, today, in spite of Korean asset management industry size being equivalent to India, their mutual fund assets in overseas products is eight times and we are still suffering from strong home country bias.

So what’s your assessment of the Indian stock markets today?

Valuations certainly are more reasonable. If we were excessively valued earlier, we are much better valued now. The problem is not that the Indian economy’s growth is not good. It is about the investment markets.

There is still a lot of heat in this market. I talk to a lot of global investors and they are quite worried about India. They are worried that India has refused to accept that there can be a slowdown.

The second issue is that global investors have other markets to look at. In the US, the question is, how much worse can it get? There is now news of huge PE investments flowing back to the US. The first set of investors usually are the sovereign wealth funds, next are the PE funds and the pensions funds, and then the smarter retail investor, finally the moms and pops getting into the market. My view is that foreign investors may start to shy away from emerging markets for a while and reallocate money back to markets such as the US.

As far as India is concerned, the one thing going for it that the absolute growth rate of 7-8 per cent is still a great number, compared to the global average of about 4 per cent, emerging markets average of 6 per cent and developed market average of 2 per cent. You should note that we are 7-8 per cent and slowing, but in some time, the US will deliver a 1 per cent or 2 per cent positive growth and begin to recover.

It is the delta (difference) between the growth rates that matters. In July 2007, that delta was in our favour, the growth differential is bound to reduce over a period of time.

I think at this time, people aren’t moving out of India, they are sitting on the fence. But my biggest worry is what happens when US starts to come out of recession; will people reallocate?

There are several global funds already in the market and during the short period since launch, they have tended to feature a high Beta (tendency to move in the same direction), relative to the Sensex. Why is that?

I think that has to do with the objectives. Some of the (global) funds here, target absolute returns that are higher than the Indian market. To do that, you have to invest in emerging markets that are highly volatile. But to diversify your risk from the Indian markets, you have to look at the economies which offer stability, if not exorbitant growth.

We believe that overseas investing is about diversifying risk and not always about enhancing your opportunity or returns. I think investors here tend to focus too much on performance and not enough on risk! Risk is the probability of achieving your outcome. You should look at how the fund on the top got there.

It may have delivered returns through tactical asset allocation; that means the performance is not repeatable. It may have chosen momentum stocks.

There were stocks that delivered 70 per cent returns in the past year; they went down by 40 per cent when the market fell. Would you be comfortable with that kind of risk? Most global institutional firms would focus on performance through a full market cycle, both up and down. The job of a fund manager is to be on the top after an entire market cycle is played out.

What strategy on overseas investing would you suggest?

First, don’t just be in equity; explore other assets classes — say, debt, commodities and real estate. Second, in each asset class explore other geographies. This will mean your portfolio has three components — core equity, core bonds and alternates. In addition, make sure each of these assets has a global leaf.

To pick a number, I would say, 40 per cent in bonds, 40 per cent in equity and 20 per cent in alternates. I would certainly not put all my investments in local markets.

You launched ING Global Real Estate Fund last year. How has real estate fared against other assets and how has the fund performed?

We decided to go for real estate because real estate has volatility that is half of equity and returns that are double of bonds. It also has a low correlation with equities.

We did a seven-year analysis to test out these numbers. Since launch, our global real estate fund has beaten gold, commodities and equities as well as bonds. The fund has a Morningstar 5 star rating & the returns are about 20 per cent in rupee terms.

This fund targets a 15 per cent return — a 4 per cent dividend yield through REITs that we hold. REITs also appreciate in value. We also own property developers which deliver earnings growth of about 11 per cent. The higher returns came about through timing the market after the sell-off. We have many blue-chip names in our portfolio; West field Group, Australia; Mitsubishi Estate Co Ltd, Japan; Boston Properties, US.

People these days immediately think of sub-prime when they think of real estate. We’re not impacted by that. We’re only into commercial real estate, not residential.

Do real estate prices move in tandem across the world?

They don’t, because it is impossible to plug supply shortages in real estate in one location with surpluses from another.

If there’s a shortage of rice in Hong Kong, they can import it, but you can’t do that with hotel rooms!

This is what makes real estate a great diversifier if you are tapping global markets, because correlation between one market and another is really very low. If the UK and the US markets are closely linked, their real estate markets are absolutely not linked.

If you accept that the big problem is our home country bias, and you need a good diversifier, there’s nothing better than global real estate.

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