Stock Picking India Style (It Doesn't Work There Either)

In an article entitled “As India Stocks Get Pricey, Who Is Picking Them ?” the WSJ, as they say in the newspaper biz, buried the lead: it doesn’t much matter who is picking them. The article goes on to describe the “big debate” among fund management companies over how to staff their actively managed funds:

Many U.S. fund firms are content making stock picks from afar, sending staff in for occasional visits. Some prefer the better oversight they have when portfolio managers are based in the U.S. or in the offices of an investment firm under contract in places like Hong Kong. In particular, many fund companies like their managers' trades to go through a major office, where conflict-of-interest or other quality controls can be better monitored.

Others, the article continues, place their staff in India.

But in reading the article there is little reason to think the location of the analysts makes much difference . In fact it seems quite likely that the analysts are irrelevant and their picks will not beat the index. While one year’s performance (all that is cited in the article) may not be sufficient to draw definitive conclusions, it seems like the analysts at the India funds listed in the article need to justify their existence:

2006 returns

India Index : 47%

Actively managed funds 100% invested in India

Matthews India 36.5%

India Fund 32.9%

Morgan Stanley India Investment 38.3%

While we would not necessarily recommend a single country index instrument for more than a very small portion of a portfolio, that alternative does now exist. Barclays Global Investors offers an exchange traded note that generates the return of an index of the overall Indian market.

Of course the WSJ author is still drinking the active fund management industry kool aid

Prices of many Indian shares have started to approach valuations seen in developed countries, and some analysts think stock picking will be more crucial to success than in the past, when many stocks rose with the market's momentum

Sorry, I fail to see the logic here. I’ve never read that the success of active management has any correlation to the level of valuation in any market. In fact with the boom in stock market investing by both locals and foreigners in the Indian market one would expect stock picking to become less not more important.

The big advocates of active management often argue that in emerging markets which have less liquidity and transparency are places where stock picking should be more important. In the case of India we have seen stock picking has not worked so far. As the market becomes more liquid and transparent (and more like the markets in the US) the markets should become more efficient and the advantages of indexing should increase.

As the world’s capital markets become more globalized and capital flows more freely across the world, the advantages of indexing and the small and value premium are more recognizable across the world in developed and developing markets.