EPI: My Pick from All India Focused Funds

Emerging market equities are an asset class which individual investors should include in their portfolios. The relative allocation may vary depending upon an individual's risk profile. Earlier I discussed this asset class and its characteristics from the perspective of dividend investing philosophy. In addition, my investment method also calls for index-based investing to capture general market performance. The discussion below is a relative comparison of index based funds, ETFs, and ETN for India's market and where they stand with reference to its constituents and performance.

Morgan Stanley India Investment Fund (IIF)

IIF is a closed-end index fund with investment objective of long-term capital appreciation. It seeks to achieve this by investing primarily in equity securities of Indian issuers. The Fund will invest at least 65% of its total assets in equity securities of Indian issuers. As per fund's prospectus, equity securities means common and preferred stock bonds, notes and debentures convertible into common or preferred stock, stock purchase warrants and rights, equity interests in trusts and partnerships and American, global and other types of depositary receipts. In addition, the fund can also invest up to 25% of its total assets in unlisted equity securities of Indian issuers.

My observation: The fund is keeping itself open to invest in any possible investment vehicles available in equity markets and then adds non-listed security as a possible option!

India Fund (IFN)

India Fund is a closed-end equity fund. It seeks long-term capital appreciation through investing in the equity securities of Indian companies. It will invest in stocks of small-cap, mid-cap and large-cap companies. It employs a quantitative and fundamental analysis with a bottom-up stock picking and asset allocation approach to create its portfolio. It benchmarks the performance of its portfolio against the IFC Investable India Index.

My observation: It has a simple description, but a confused execution method of combining quantitative and fundamental analysis for bottom picking.

iPath MSCI India Index ETN (INP)

INP is an Exchange Traded Note based on MSCI India Total Return Index. The Index itself is a free-float adjusted market capitalization index designed to measure the market performance (including price and income from dividend payments).

My observation: It is an ETN, a promissory note, and hence investors do not have any ownership of security in fund itself. It attempts to keep it simple and links to MSCI ITR index.

Wisdom Tree India Earnings Fund (EPI)

EPI is an Exchange Traded Fund which tracks the price and yield performance (before fees) of the WisdomTree India Earnings Index. This Index measures the performance of profitable companies incorporated and traded in India that are eligible to be purchased by foreign investors. Index consists of securities that have market capitalization between USD2 to USD10 billion.

My observation: Attempts to track the performance of profitable companies. It includes corporations that have large market cap and are eligible for foreign investors.

PowerShares India Portfolio (PIN)

PIN seeks investment results that correspond (before fees and expenses) generally to the price and yield of the Indus India Index. The investment strategy of the fund is to invest substantially all of its assets in a wholly owned subsidiary in Mauritius. The fund may invest at least 90% of its total assets in securities that comprise the India Index and American Depository Receipts based on the securities in the India Index.

My observations: Fund invests through its wholly owned subsidiaries in Mauritius for favorable taxation. It invests 90% in ADRs and India Index companies.

Constituent Analysis of All Funds (see attached table):

• All these four funds have somewhat similar objective to track performance of Indian Corporations. Funds IIF, IFN, and PIN provide a convoluted description of their investment vehicles and execution methods. Funds INP and EPI have somewhat simple description and simple execution method.
• The attached table shows each fund's total fees and expenses. Funds with more than 1% fees and expenses are IIF (1.40%) and IFN (1.18%). While funds INP (0.89%), EPI (0.88%), and PIN (0.78%) have less than 1% fees and expenses.
• The total percentage investments in top 10 corporations show that 3 out of 5 funds (IIF, INP, PIN) have more than 50% investments in top 10, while one more (IFN) is close of 50%. Ironically, the fund with highest expenses (IIF) has approx. 62% invested in top 10. Fund EPI has 46% invested in top 10, with almost 17% allocation to just one corporation.
• The table also shows the top 10 individual corporations in which these funds have investments. After such high fees and varied executions methods, these funds could find only seven specific corporations (in 4 funds or more), four corporations (in 2 or more), only 10 corporations (in one fund only). To put this into perspective, on India's Bombay Stock Exchange, there were 7500 listed equities (in 2006), 7706 equities (in 2007), 7821 equities (in 2008), and 7784 equities (in 2009). The exchange's index, known as Sensex, itself has 30 companies on its roll. In short, with all the expertise these funds have, they could only find 21 companies of which more than 10 are common occurrences.

Relative Performance Comparison (see attached chart)

The comparison of the relative price movement from January 2007 to January 2009 for all five funds is shown in the chart.

• Ironically, the two funds with highest fees and expenses (IIF and IFN) have the worst performance. These funds have been continuously lagging the market index (^BSESN) for last two years. IIF and IFN have a 10 year historical results which, in general, also shows similar trends. The 10 year past history shows the funds' performance is higher than market index during increasing trend, however, during downturns it is significantly lower than market index.
• PIN and EPI are still new and have comparatively shorter history.
• EPI and INP are two funds which, in general, are lagging market index, but relatively better than IIF / IFN funds.
• It is important to note that these are fund performances before fees and expenses. It is likely to be little worse after incorporating fees and expenses.

Conclusion

• IIF and IFN are not worth their fees and expenses, 50% of their assets are invested in almost the same corporations, and have significant lagging performance.
• PIN is very new with complex execution. INP is a promissory note i.e. added risk, and nothing unique with reference to constituents, expenses, and performance.
• Wisdom Tree's India Earnings Fund (EPI) is relatively a good investment vehicle for individual investors looking for getting general market exposure India's economy. This fund has a very simple objective of investing in large profitable companies and the ones in which foreigners are allowed to invest. Investors should invest knowing that it has large allocation to one particular company and has 0.88% expenses. As of February 20 2009, EPI is trading at USD10.02. Investors can get exposure to profitable corporations in Indian economy at an attractive value.

Full Disclosure: Long on EPI.

Comments

[d_teller:]

Does the comparison chart account for the dividends and cap. gains paid during the last calendar year?.

IFN paid a lot, and its NAV went down, subsequently. If only the NAV or the Market Price (with CEFs the Market and the Nav are often widely different), then the chart isn't very useful.

With regard to the relative holdings, the CEFs are under some reasonable restraint (unlike ICICI, HFDC and other investment banks), to purchase securities with a transparent, and verifiable cost...in other words, there may be thousands of securities available...and many may represent good value to a local, and knowledgable investor, but from overseas, the Indian SENSEX is not easy to follow, nor are its listings adequately analyzable.

I am not faulting your efforts, but wish to query the findings in deeper detail. The relative costs/expenses is useful, but it would be also interesting to compare the total holdings (number of securities, share classes, [other holdings, such as non-dividend -paying securities]), as one does for open-ended mutual funds.

Finally, is there any basis for the concentrations, such as cap-weighting?

Feb 24 08:38 PM

[Teak:]

I agree with the first commenter. As a holder of IFN, I have enjoyed the distribution payouts which I reinvest. Will EPI pay-through company dividends, or will the 'managers' use the money to increase the NAV and, thus, their 'management fees'? Comparing the % mgt fee is not in itself a complete comparison, you must also include info regarding distributions.

I am not a fan of mutual funds, and I use country-based closed-end funds only to get exposure to countries where it is difficult to buy shares directly. I want dividends paid through, not retained by the 'manager'.

Feb 24 08:53 PM

[EconoMarcus:]

I mostly agree with your analysis of these funds. A few months ago I came to the same conclusion: EPI is the way to go. So I put it in my virtual long-term account, ready to buy once the markets had definitely found a bottom. But I have changed my mind since. Not about EPI but about India as a long-term investment. Pakistan, its neighbor and main enemy, is more or less a failed state or is about to become one. The Taliban are getting more and more influential as politicians are loosing their power and army forces seem to be rather capricious. I don't want to know what happens once the Taliban or other (military) radicals finally can get their finger to the nuke button... Therefore I banned India - although promising on its own - from my long-term portfolio.

Feb 24 08:58 PM

[Subhankar:]

Because Taliban is bad for Pakistan therefore one shouldn't invest in India? By the same logic, Hamas is bad for Palestine so one shouldn't invest in Israel?

Get real, folks. India is going to be one of the hottest investment destinations over the next couple of decades. This is the time to dive into - not ban - India.

For d_teller: I write a weekly Sensex update which should not be too difficult to follow.


On Feb 24 08:58 PM EconoMarcus wrote:

> I mostly agree with your analysis of these funds. A few months ago
> I came to the same conclusion: EPI is the way to go. So I put it
> in my virtual long-term account, ready to buy once the markets had
> definitely found a bottom. But I have changed my mind since. Not
> about EPI but about India as a long-term investment. Pakistan, its
> neighbor and main enemy, is more or less a failed state or is about
> to become one. The Taliban are getting more and more influential
> as politicians are loosing their power and army forces seem to be
> rather capricious. I don't want to know what happens once the Taliban
> or other (military) radicals finally can get their finger to the
> nuke button... Therefore I banned India - although promising on its
> own - from my long-term portfolio.

Feb 25 01:12 PM

[Dividend Tree:]

d_teller:
I think it is different perspective. I would agree with all your arguments from a "subjective financial engineering" viewpoint. However, from an individual investor's viewpoint, I have a difference of opinion. (1) individual investors viewpoint, NAV vs. market price has no meaning. Through out the last 2 years it has been trading at discount, except for few days in 08. When investors sell in open market, its the market price which counts, not NAV. (2) paying a lot of distribution and reducing NAV as no affect to individual investors. Its like selling ones property to generate cash!! (3) regarding constraints and restraints of buying securities, if that's the case then all CEFs/ETFs/ETNs have same issue. If one fund can do that with low expense, why IIF is asking for more. (4) total holdings or coverage or cap weightage, it really does not matter because the fund still invests more than 60% in top ten alone. Other funds do the same with less fees (5) High fees has to come with certain quality in investment process. If fund is doing the same as other funds, then higher fees is not justified. So from individual investor perspective, its performance and execution is same as others, plus worst performance, and hence does not justify the higher fees. (6) I would agree with you on transparency or following SENSEX. It is pain in neck. but again, why have higher fees when investors get the same in less!

Teak: EPI pays cap gains and dividends once a year, dividends are "earned income" for tax purposes. So far, it has not yet retained dividends.

EconoMarcus:
regarding investing in India - I would agree with you on geo-political environment in Indian and its neighbors. I did make very similar comments about India at my blog (www.dividendtree.net/2.../). India/Pakistan have been bickering about each other for last 50+ years, have three fought wars, and its a never ending cycle. Focusing on positive side, Indian economy is continuously growing, last 15 years its been progressively following reforms process. Short term it may issues, but longer term, I expect it to continue to grow. As a matter of fact, now is the right time to invest in India. Buy low, sell high !!

Subhankar:
Any discussion on Indian equity markets ends with list of ADR companies. That's it. Because nothing is properly disclosed or available or restricted. To put it mildly, just getting information and/or attempting to follow Indian equity markets is a pain in neck.

Feb 25 03:19 PM

[EconoMarcus:]

Subhankar: There are at least two critical differences between the Taliban in Pakistan and Hamas in Palestine: a) The Taliban are slowly taking over - bit by bit - the country (not only but also geographically; Islamabad is near already...). Hamas not at all. b) Pakistan has nuclear weapons. What comparable to nukes has Hamas?
I respect your opinion but I suggest you take another close and careful look at reality and present tendencies in Pakistan. Consult some trustful sources. And ask yourself why the US is (unfortunately without much luck or success so far) fighting the twins Taliban and Al Qaeda over there. It's not just 9/11. Now it's the threat of a nuclear power getting out of control. Not today. But beware of ignoring the dangerous signs and tendencies! Even uncertainty alone will be a poison for Indian stocks.

Dividend Tree: I agree that India on its own is an extremely attractive country from an investor's viewpoint. That's why I used to be invested there almost as big as in China (and that's pretty big). I first cut in half my exposure to India before I got completely out of the markets in mid 2008. But now when I see how Pakistan is reeling... I had to be realistic: For long-term investments there are safer places around the globe with many similar opportunities. Why take the additional risk? A trade every now and then, ok, but any longer-term deals there have to wait till the situation in the northwest has stabilized.

That's just my take...

Feb 25 06:41 PM