High-performing mutual fund catches investors’ attention 21/08/00

That kind of crowd turned up for a recent Toronto appearance by Bharat Shah, chief investment officer of India-based Birla Sun Life Asset Management Co. Ltd., the asset management side of a joint venture between Sun Life Financial Services Inc. and the Aditya Birla Group, first announced in December, 1998. The joint venture also distributes mutual funds and other investment products and hopes to tackle the India life insurance market, pending government approval.

Including recent acquisitions of mutual funds, Birla Sun Life Asset Management now manages $1.5 billion in 11 funds based in India, including the underlying fund in the Excel India Fund which posted Canadian returns for one year at 202% for the calendar year 1999. The fund has a management expense ratio of 2.5% and holds $21.5 million, with 84% invested in equities and the remainder in cash and cash equivalents.

Shah manages the underlying fund, which generated those returns partly through successful stock picking and partly through some complicated international tax manoeuvring that allows returns to flow to foreign investors without any tax liability. While Indian law normally provides limits on foreign investments and a withholding tax of up to 30% on foreigners’ capital gains, the Canadian-domiciled Excel India Fund circumvents both provisions by purchasing units in another fund, sometimes called a sub-fund, domiciled in Mauritius and called the India Excel (Mauritius) Fund. The Mauritius version in turn invests in the India-based fund managed by Shah, a manoeuvre made profitable by a tax-exempt treaty between Mauritius and India, meaning the investor’s only tax liability is his own capital gains tax payable in Canada.

Speaking to the understandably attentive crowd in a Toronto hotel, Shah said that information technology companies including software manufacturers had generated much of the gains, and still account for 56% of the fund’s total holdings by dollar value.

In that category, he says companies such as Infosys Technologies, a software manfacturer which claims a rapidly growing list of Fortune 500 companies as clients, software manufacturer Visualsoft Technologies Ltd., and Subex Systems Ltd., an exporter of telecommunications software and service will continue driving returns.

In the media and communications category which accounts for 8% of fund holdings, he says he hopes Zee Telefilm Ltd. will continue to increase the fund’s returns, partially due to its well-developed cable network and variety of revenue streams, and partially due to the Indian population’s appetite for entertainment. “Their need for entertainment exceeds the need for food,” he said.

Shah believes several positive factors in India’s economic outlook will push the Excel India Fund as well as other Birla Sun Life funds. These include growth in gross domestic product at 6%, a middle class with increasing purchasing power, stable inflation estimated at between 4% and 5% this year and a prediction that the India rupee will depreciate about 5% against the U.S. dollar, leading to increased exports of technology and software. “In the long-term performance is a function of only one thing — the quality of the performance of the underlying business,” he said. “That means you focus on what kind of business performance that business will deliver.”

Still, the fund’s reliance on the information technology sector and India’s uncertain political climate mean it is not ideal for the weak-of-stomach investor needing predictability and stable returns. “We cannot promise that we will continue to deliver 200% per annum,” he said when asked about the fund’s outlook.

On that score, Shah’s forecast has again proven correct. Since his Toronto appearance, negative returns in recent months — including –23.2% for the last quarter and –20.9% on a six-month basis have driven the one-year return down to 86.9%, effective June 30.