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India fund sees top returns
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February 26, 1999: 1:10 p.m. ET
As emerging markets suffer, one fund focuses on software and consumer goods
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NEW YORK (CNNfn) - A world away from Wall Street in the teeming city of Bangalore, India's "Silicon Valley," software developers at Infosys Technologies are working for multinationals like Apple Computer, Nestle and Reebok.
Infosys will become the first company from India to be traded in the United States as an American depositary receipt this spring -- and it's a top pick at Eaton Vance Greater India Fund, one of the best-performing international funds of the year to date.
"The best managed companies in the emerging markets can be found in India," said Zaheer Sitabkhan, 34, a co-manager of the fund in Hong Kong. "For bottom-up stock pickers, no emerging market in the world can offer better stocks."
A mutual fund that focuses on one country is a lot riskier than a diversified international fund, and one that invests in an emerging market is riskier still.
Yet as the global economy becomes more tightly woven together, the story behind Eaton Vance's India fund is a snapshot into how one Asian market is faring amid world economic turmoil.
Sitabkhan, who has traveled extensively through Asia, Eastern Europe and Russia, said individual investors should recognize that Indian companies, more than any in emerging markets, use proven western business strategies.
"India is in such poor shape, but they're doing a good job with what they have," he said.
A strong 1999 showing
After losing money in three of the past four years, the India fund is up 14.20 percent year-to-date as of Feb. 24, according to Morningstar, a Chicago mutual-fund tracker. The fund is ranked fourth among 30 top-performing international stock funds by Morningstar.
The fund, with $8.9 million in assets, received two out of five stars for risk-adjusted returns. It is ranked second in its category, which includes funds that invest anywhere in Asia but Japan. (Click here to see more of the fund's returns).
Emerging markets in pain
Meanwhile, emerging markets funds overall were down 2 percent as of Jan. 31, said Kunal Kapoor, an international analyst at Morningstar. While figures for February aren't available, he said it's likely those funds are down even more, largely because of problems in Brazil.
Emerging markets funds first started feeling pain when the Asian currency crisis unfolded in mid-1997. The average open-ended emerging markets fund lost about 27 percent in 1998, Kapoor said. The top losers were Excelsior Emerging Markets Fund, down 41 percent that year, and Montgomery Emerging Markets Fund, down almost 39 percent.
One of the most popular funds in the category, Templeton Emerging Markets Fund, shed 18 percent in 1998, he said. Even the winner in the category lost money -- Dresdner RCM Emerging Markets Fund gave up 8.5 percent.
A lackluster Indian economy
Sitabkhan said in phone and e-mail interviews that the Indian economy has been flat in recent years, with industrial production hit hard by excess capacity, falling prices and shrinking profit margins. The only growth has come from agriculture, with good grain crops, he said.
But India remained untouched by the so-called "Asian contagion" because it's a relatively closed economy, he said. The main impact of the Asia turmoil has been on India's declining commodity prices, such as steel, petrochemicals and bulk pharmaceuticals, he said.
"These are big industries in India and these companies are making very poor profits, and in many cases, losses," Sitabkhan said.
So plays in consumer goods like Hindustan Lever, the fund's top holding, make sense, he said. Hindustan Lever is owned by Anglo-Dutch consumer conglomerate Unilever and produces staples like soap, detergent and tea, among other items.
Likewise, the software sector is booming. Sitabkhan said Bangalore used to be a green, leafy city in the south of India, but now it's a crowded hub with dozens of business parks and overflowing streets. The city is home to many software start-ups, with Infosys the most well-known.
In the old days, U.S. companies looked to Indian software businesses as "cheap body shops," he said. But these days companies like Infosys are providing advanced technical help in Internet and e-commerce areas. American depositary receipts for Infosys probably will be available in the United States in April, Sitabkhan said.
His fund also owns Zee Telefilms, a software and TV producer of India's most popular television programming. The business may merge with Rupert Murdoch's Star TV, which could help it grow exponentially, he said.
"This is a smaller company that has the chance to grow manifold if the merger plans unfold," he said.
But should you buy it?
Kapoor, of Morningstar, said most individual investors would be better off buying a diversified Asia fund. A single country fund is only for the most aggressive investors -- and even then it should not be a large part of a portfolio.
Overall, the outlook for emerging markets in 1999 is cloudy, Kapoor said. While there is talk that the worst is over in Asia, he said, Latin America may continue to suffer from Brazil's problems. China also may face a currency devaluation.
In the face of such skepticism, Sitabkhan remains bullish. He manages assets worth $60 million in India, and also oversees an Asian small companies fund and several pension funds.
Beneath the gloomy headlines, the companies in the fund are on a fast-track for growth in spite of all of the strikes against them, he said.
"Our emphasis is on stock picking," he said. "We have been able to put this winning formula together and we have no reason to think it won't work in the future." 
-- by staff writer Martine Costello
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