Interestingly, China has underperformed the overall emerging markets on a 10-year basis. Except for 1998, China underperformed the other BRIC countries as well.
China has been getting more press lately than India and there are more investment funds available for China oriented investors than there are for those interested in India. [click to enlarge chart]
Two of the choices for investing in India are:
INP is a stock market listed debt instrument, the principle of which is adjusted to equal the performance of the MSCI India Total Return index, less the management fee of 89 basis points.
IIF, actively managed by Morgan Stanley, is a leading CEF with wide portfolio manager discretion. Its expense ratio is 137 basis points.
We tend to like INP more than IIF because we desire the ability analyze historical attributes of the portfolio. That is easy to do with an index fund, but difficult if not impossible to do with an actively managed fund with an extremely broad investment objective. Consider the IIF investment objective below – you are buying management and performance, but not information about what you own under the hood.
IIF Investment Objective: Morgan Stanley India Investment Fund, Inc. is a non-diversified, closed-end management investment company. The Fund's investment objective is long-term capital appreciations, which it seeks to achieve 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; which for this purpose 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. The Fund may invest up to 25% of its total assets in unlisted equity securities of Indian issuers.
Now consider the “investment objective” for INP (the fund doesn’t actually have a portfolio but it’s value is pegged to the benchmark index). You are buying the index and can research that thoroughly.
IPN Investment Objective: The iPath MSCI India Index ETNs are linked to the MSCI India Total Return Index (the "Index"). The Index is a free float-adjusted market capitalization index designed to measure the market performance, including price performance and income from dividend payments, of Indian equity securities. The Index is currently comprised of the top 68 companies by market capitalization listed on the National Stock Exchange of India (the "NSE").
Counter-Party Risk: As we have noted in a prior article, ETN’s introduce a counter-party credit risk element, but at this time, we do not believe that risk is material. The total of liabilities of iPath ETN’s relative to Barclay’s overall size is not something of concern to us today. As ETN’s increase total liabilities for Barclay’s over time, the question of counter-party risk should be periodically re-evaluated.
Top Ten Holdings of Each Fund (as of 12/31/2006):
The two funds share 3 of their top holdings in common (Infosys, HDFC Bank and ITC).
Annualized Performance (as of 12/31/2006):
It’s hard to say which will produce better returns going forward. The 1-year performance is an effective draw and the 3-year performance favors INP, but the 5-year history favors IIF. Giving more weight to the more recent periods, we think INP probably has the lead. Only time will tell.
* * * * *
We prefer INP to IIF due to a nearly 50 basis point expense advantage, greater portfolio visibility and ability to analyze the underlying portfolio characteristics to make our own decisions -- not having to rely on the alpha from security selection, but rather the alpha from tactical asset allocation through active indexing instead.