• The First State Regional India Fund will temporarily cease accepting subscriptions from 1 January 2012
• The soft closure has been deemed necessary to ensure that the managers are not hindered in their ability to generate good investment returns for existing unit holders
• We are highlighting the Aberdeen India Opportunities Fund as an alternative to the First State Regional India
• While longer-term returns have not been as strong as its peer, the Aberdeen India Opportunities Fund has delivered a resilient performance in the recent market downturn, a feature it shares with the First State Regional India Fund
• We suggest that investors who already own the First State Regional India should retain their holdings; investors looking to buy an India equity Fund in 2012 should consider the Aberdeen India Opportunities Fund

Outperformance of our recommended India equity fund in 2012

On the platform, investors looking for exposure to the broader India equity market have five funds to choose from: Aberdeen India Opportunities, DWS India Eqty Fd Cl A SGD, First State Regional India Fund, HGIF Indian Eq SGD AD and LionGlobal India Fund. While the India equity market (represented by the SENSEX) has turned in a relatively dismal performance in 2011 so far, our recommended fund in the India equity space – the First State Regional India Fund – has delivered a relatively resilient return, outperforming both the SENSEX and the MSCI India (the fund’s benchmark) by a healthy margin (see Table 1).

Soft Closure for First State Regional India in 2012

The stellar performance of the First State Regional India Fund has led to new inflows, which is usually good news for the manager (a vindication of the manager’s ability), but has also brought about capacity issues. The manager has deemed that the fund’s size is approaching the point where it may start to affect the fund’s performance, especially since it may restrict the manager’s ability to invest in smaller companies. The First State Regional India Fund will thus be “soft-closed” come 2012, which means that the fund will temporarily cease accepting subscriptions from 1 January 2012*, until the managers determine that capacity issues are no longer a constraint.

[*The platform has ceased accepting monies for subscriptions from 23 December 2011, 3pm while all outstanding RSPs will be terminated after the December subscription. See FSM Announcement: 16 December 2011 for more details.]

While the move will affect our ability to recommend the fund to new investors come 2012 (since the fund will temporarily be unable to accept subscriptions), we view the soft closure as a positive development which highlights the manager’s willingness to protect the interests of existing unit holders. 

Differences in stock selection and sector allocation...

With our recommended India equity fund slated to cease receiving subscriptions from next year, we select the Aberdeen India Opportunities as a credible alternative in the India equity fund space. There are various differences between the two funds, with the Aberdeen India Opportunities having a larger sector allocation to Financials and Information Technology compared to the First State Regional India Fund, while the latter has a higher percentage of assets in Consumer Staples, Industrials and Telecommunication Services. The different approaches of both funds are also obvious from a quick glance at the top ten holdings of both funds: only the consumer staples giant Hindustan Unilever appears on both lists.

...But defensive nature is a shared characteristic

Despite the differences in stock selection, both funds are characterised by their resilience, which has generated positive alpha for both funds given the weak performance of the Indian equity market so far this year. On a year-to-date basis (as of 30 November 2011), the Aberdeen India Opportunities declined -23.8%, outperforming its benchmark, the MSCI India (TR) by a hefty 9 percentage points (see Table 1). This resilience was also evident in 2008, which was an extremely poor year for global equity markets. In that year, the Aberdeen India Opportunities returned -53.2%, outperforming the MSCI India (TR) by a hefty 11.5 percentage points. The resilience of both funds in market downturns has clearly helped their long-term returns, with both delivering superior returns vis-à-vis the MSCI India (TR) index as well as the SENSEX over cumulative 1-year, 2-year, 3-year, 4-year and 5-year periods ended 30 November 2011 (see Table 2).

Implications for investors

While the soft closure of the First State Regional India Fund in 2012 means investors will not be able to subscribe for new units (until further notice), existing unit holders in the fund will not be affected, but may instead benefit from the measure, since the decision was undertaken to ensure that the managers will not be hindered in attempting to deliver above-benchmark returns for existing investors. As such, we encourage investors currently invested in the First State Regional India Fund to retain their holdings. Nevertheless, the soft closure poses an issue for investors looking to invest new money in the Indian equity market. Like its peer, the Aberdeen India Opportunities has delivered resilient performances in difficult markets, and while the fund differs from the First State Regional India Fund in its approach, the fund’s credible long-term track record means that investors looking to buy an India equity Fund in 2012 should consider the Aberdeen India Opportunities as an alternative to our current recommended India equity fund. We are thus adding the Aberdeen India Opportunities to our recommended list of funds.