Interview- Rajat Jain

‘Don’t invest more than 10-15% abroad’

Sandeep Singh

Posted online: Monday , October 08, 2007

International funds are the flavour of the season, with several funds targeting specific geographies — emerging markets, Asia, India and China, and so on — hitting, or waiting to hit, the market. While the deluge is recent, Principal Mutual Fund was one of the first to launch an overseas fund, PNB Global Opportunities, in March 2004. Chief investment officer Rajat Jain expects a lot of activity in this overseas investing space. In an interview to our correspondent, Jain spoke about a range of issues related to overseas investing.
Principal Global Opportunities Fund, was among the first overseas funds to be launched. How is it doing and do you have any plans to launch more international funds?The scheme is doing well. When we launched it, it was a Rs 15 crore fund. Today, its corpus is Rs 610 crore. Since only the amount invested is considered to calculate the overseas limit of $300 million for a fund house, and the scheme has grown a lot on performance, it can still take on more investments. This fund invests fully in international markets. As of now, we don’t have any plans to launch a fund where 65 per cent is invested in India and the rest overseas.
Recently, the overseas investment limit for a fund house was increased from $200 million to $300 million. Are you happy with such gradual hikes? Or, would you like to see a higher limit or be completely done away with?We welcome the recent hike in limits for offshore investment by Indian mutual Funds. The industry is yet to utilise the current investment limits for such investments. However, my sense is that the limits will get up used faster now as investors see the benefits of diversification and investing in offshore investments using mutual funds.
What is the breadth of overseas products investors can expect from your fund house?Globally, Principal manages funds in different categories like US equities, global equity, emerging markets equity, fixed income and real estate, among others. We will look to launch products in India that give value to investors here and which are likely to find good demand. However, there is currently no product on the anvil in this space.
How much of an investor’s portfolio should go into overseas funds?It can’t be a very large part of your equity allocation. Although emerging markets are growing well, I would suggest capping overseas exposure at 10-15 per cent. Also, only existing investors should invest in overseas funds. New investors should stick to domestic funds.
But aren’t domestic share valuations stretched?I look at the market in two parts. The first is performance of the Indian economy and government spending. The second is the flow of funds. As far as the economy goes, there is a gradual slowdown. Still, GDP growth of 8.5 per cent is expected, and there’s not much concern on that front. Corporate profit growth is expected to remain at about 15 per cent a year over the next five years.India moves in tandem with global markets now. In the long run, though, the differentiation in performance comes in. India has a strong capital expenditure cycle and strong visibility. Infrastructure sectors will continue to do well.At the same time, there will be meaningful volatility, which will create opportunities.
Which infrastructure sectors in particular?The highest growth is expected in power, roads and telecom. Regulations in these sectors have matured and are stable. Earlier, regulations were evolving, but now we have workable model in these sectors, and things are working well. Demand is not an issue. Also, funding is, by and large, coming through. I see a lot of value creation in these three sectors.
Even the power sector can be divided further. Which segment will see the maximum growth?Suppliers to companies in the power industry. A lot of investment is needed in transmission and distribution. So, companies who go down the chain have good potential to grow.
What are the risks that this may not pan out as planned?It can only be regulatory changes. Regulations need to be stable. If any stringent regulations come in, people putting money will get wary.
Still, one has to pick the right companies. What parameters do you focus on while picking stocks?We give the maximum importance to management, as they are the trustees to our investment.So, we look for good, competent managements. Then, comes the business. Here, we try to see if the company has any unique edge — for example, the cheapest product, efficiency of scale for a commodity business. We try to see if there is a fundamental change happening in the company that could make it better. Is the company getting into new areas, which will impact it positively and help it better the market? Finally, we look at valuations.
What’s your take on the proposal to waive entry loads on investments made directly and through the Internet?It will be good for investors, but the advisory role of distributors will be missed.
But not all advice offered by distributors is of the highest quality. And neither do all investors seek advice.The quality of advice is gradually changing. Increasingly, new distributors are coming in, and giving good long-term advice. I meet distributors in my capacity as a fund manager or chief investment officer, and I can see the quality of questions they ask. Their level of knowledge is good. They ask questions on behalf of investors.
Now, there are reports that Sebi might ask mutual funds to not just waive loads for certain types of investments, but also ask funds to charge less as expenses?We feel the fee structure for mutual funds in India is competitive and in line with that in developed markets. Besides, the fund industry has managed to spread the investment culture in the country, and the cost of reaching out to the customer is high on account of infrastructural issues and technology costs.
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