Lightening Up on the India Fund 12 comments
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That makes for a nice profit in a bit over a year -- I originally bought in early July last year at $30.15.
So why did I sell? Well, there are a couple reasons.
I do still think India is a solid investing market, and I expect it will make some fortunes in the years to come. That's why I'll still come out of this with a small IFN position. But after a huge run up, I'm quite cautious about the near term performance of the Indian stock market, even after their big selloff in the last month or two.
But primarily I sold because of the structure of the fund itself. If it were an index fund, none of which are available for India at the moment, I might have continued to hold. But the India Fund is a closed end fund, which means it's essentially a mutual fund with a fixed number of shares that can be traded on the market at either a discount or premium to its actual asset value.
And the India Fund now trades at a pretty dramatic premium. When I bought shares about a year ago, the shares were trading at a premium to the underlying value of the stocks they held of under 5% -- and that seemed a reasonable premium to pay for me.
But today, the premium has gotten entirely out of whack and stands, as of Friday, at 19%. That means of the 40% or so in gains I've gotten from this stock, more than a third of the gains have been from the increase in the premium. This is the largest the premium has ever been since inception. The fund has typically traded at a very small discount or premium in the range of 3-6%, and the only time it's gotten this out of whack was back during the late '90s stock market boom when it traded at a 10%+ discount.
The premium can be loosely interpreted as a measure of US retail investor enthusiasm for the Indian market, since it's a very difficult market to invest in for small outsiders (except for a few big ADRs like Tata (TTM) and Infosys (INFY) ), and based on that I think holding a big chunk of this fund is taking a big near term risk. Even if the Indian market continues to perform relatively well, if it just stays more or less stagnant and investor enthusiasm wanes we could possibly see a 15-30% drop that has very little to do with the earnings or performance of the companies in the fund.
Add to that the fact that Blackstone charges a pretty high management fee for this fund, something in the range of 4%, and I think I'm taking too much of a chance in maintaining a full position.
But I said that I was going to keep some anyway -- how? Well, IFN is in the midst of a rights offering for current shareholders, which allows us to purchase shares at a 5% discount to the net asset value (making the discount compared to the actual market value very large indeed). I've sold all my holdings but am exercising my rights, which means I'll essentially end up with about a third of my original holdings at a new cost basis that is only slightly above the price I originally paid, and that is significantly lower than today's market price, while locking in some very good gains for my original purchase.
Exercising my rights offering was a no-brainer -- it will likely be possible to make a profit just by exercising the rights and then selling immediately, assuming the shares don't move too quickly in the next few weeks to close the premium gap (the price will be determined based on the NAV this Friday). But I'll hold, at least for now -- I'm willing to hold these new shares as a flier on the Indian economy, but I have great reservations about the fund's overhead and effective leverage (the premium) and would be delighted to see that market open up a bit more to foreign investment so that a nice low cost, high correlation index fund could be opened.
IFN 1-yr chart:
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This article has 12 comments:
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Thanks,
Travis
I'm a little surprised you didn't swap out to IIF the moment the premium ballooned. IIF isn't all that different, it's cheaper (a comparatively rational 140 bps, vs IFN's 4-freaking-00), and it's premium didn't blow up the way IFN's did.
Heck, if IFN's premium were a little higher and IIF's maybe a small discount I could see shorting the former against the latter. 'Tain't so, so I'm busy shorting CRF and CLM and their 75% (!)/45% premiums against a US index proxy instead.
And the Powershares ETF is just about worthless, in my opinion -- an index of the US-listed shares and ADRs gets you only those shares that are already themselves trading at a big premium to their domestic counterparts, and it really reduces exposure to the non-tech-outsourcing parts of the Indian economy. I'd like an actual representative, lower cost index ETF of the Indian market, much like I own for Korea or can get through Ishares and others for dozens of other countries.
"But after a huge run up, I'm quite cautious about the near term performance of the Indian stock market, even after their big selloff in the last month or two."
India's Economic Time is still o k - but the RBI is still printing money too generously, driving up inflation and thus yields. At some point I expect a hefty tightening, one that will worsen India's Economic Time and the economy's profits outlook.
Cheers,
Travis