HEAD-TO-HEAD: First State vs Goldman Sachs

Added 7th October 2016

FSA compares the First State Indian Subcontinent Fund with the Goldman Sachs India Equity Portfolio Fund.

HEAD-TO-HEAD: First State vs Goldman Sachs

Structural reforms are firmly underway in India, and investors are optimistic that they will make public spending more efficient, help optimise private investment, improve corporate earnings and drive up domestic equities markets.

Fund managers such as Mirae, Emerise and HSBC GAM, for instance, expect the upcoming Goods and Services tax to boost household consumption and enhance the business environment in general.

The unexpected interest rate cut by the Reserve Bank of India earlier this week, from 6.5% to 6.25%, lifted the stock market, and confirmed that the central bank’s monetary policy is flexible and likely to be accommodative.

The benchmark Nifty 50 index is trading at a price-earnings ratio of 19 times, based on earnings to March 2017, and already above the long-term average.

Against this backdrop, Mark Laidlaw, senior analyst of Asia manager research at Morningstar, provides a comparative analysis of the First State (FS) Indian Subcontinent Fund and the Goldman Sachs (GS) India Equity Portfolio Fund.

“The Indian equity fund category is quite a competitive landscape,” he said. Both funds receive a silver rating from Morningstar, and since there is no gold-rated funds in this category, “they are our favourites.”

Investment Strategy 


The two funds have distinctive investment styles, Laidlaw said.

The FS fund is all about bottom-up stock selection and a focus on absolute return, rather than relative return. Their robust buy-and-hold policy results in low turnover, he said.

“The team looks for companies that can deliver sustainable and predictable growth, instead of unexpected one-off growth.”

One factor that differentiates the fund is its focus on the company management, he said.

“It’s particularly important when you look at Indian equities in general, given that many listed companies in India are family controlled.”

The fund carefully considers how these people have acted during their careers and how they have treated stakeholders, in particular during times of stress, he added.

Furthermore, “the portfolio, like all the strategies by the team, is concentrated and benchmark-agnostic, with typical 30-40 names.”

So far, the fund concentrates heavily on consumer staples (14%), a reflection on how the fund prefers solid business, family names with predictable growth patterns.

Laidlaw noted that valuations of consumer staples have become more expensive in the last few years, as they are more defensive and offer downside protection. The FS team warned that high valuations means it is harder to find opportunities, he said.

“The risk-reward comes from what they are going to gain from selling an existing holding that they are comfortable with, to taking something that might be attractive but with a high valuation.”


Mark Laidlaw, senior analyst of Asia manager research at Morningstar


According to Laidlaw, the GS fund, “looks at firms that are trading at a significant discount to the intrinsic value. The research focuses on business fundamentals, corporate governance, shareholders’ alignment and capital discipline.”

While the team is valuation-driven, it will also invest in stocks with higher multiples, he noted. “The valuation might be higher than the level they are normally comfortable with, but can be justified by the [expectations of] organic growth and cash flow generation.”

The manager uses a bottom-up selection process for most of the time, but will sometimes conduct sensitivity analysis on the effects of how macro factors.

The GS portfolio “is a lot more diversified, and can hold around 100 names,” he said. Although the fund tends to hold a lot of small- to mid-caps - which can account for at most half of the portfolio - “it is essentially a true all-cap fund”.

In fact, the $1.88bn fund size, “could make it harder for the manager to access smaller-cap stocks,” said Laidlaw.

Nevertheless, its rapid growth in 2014-2015 didn’t seem to affect the fund’s performance, he noted.

“While it is a potential concern, the fund manager has shown that it has not been affected so far, and we are comfortable that if it does become an issue, steps will be taken to make sure that capacity will not be a problem,” he said.




Both funds have beaten the benchmark MSCI India index and the category average for three-year and five-year performance.

The FS fund has a trailing three-year return of 22.64%, versus GS fund’s 23.73%, as of September 30. The MSCI India returned 11.18%, while the category return averaged 18.01%.

In fact, the average category return has performed better than the index in the one-year, three-year and five-year horizon.

Although the FS fund has a more concentrated portfolio, “the standard deviation, a measure of volatility, has typically been lower than the index and peers.”

“The FS fund has historically been more resilient in downturns,” Laidlaw noted, “which highlights the team’s quality and absolute return focus.”

The GS fund has also performed well, “but on the downside, it’s not as strong as the First State fund.”

 Source: FE Analytics

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