Halbis India Alpha Fund

Choppy waters hold profit potential for Halbis' India ace

Originally published in the April 2007 issue

It is not often that a fund's managers are looking forward to soft-closing their fund within a month or so of launch, but this is the fortunate position that the managers of the new Halbis offering, India Alpha Fund, find themselves in.

India, and the Indian markets, have been attracting a great deal of interest from the asset management community recently, although some big international players like Merrill Lynch remained cautiously underweight last year, and Citigroup's India strategist Ratnesh Kumar was talking about a "defensive approach" to the Indian market following the sell-off in February which saw the BSE index lose 15% of its value. A buying opportunity, or evidence of more systemic problems within the fast-growing Indian economy? Many Indian market commentators agree that investors can expect volatility to pick up this year, something that will enable the Halbis team to make full use of their long/short mandate.

Halbis is taking an absolute return approach to Indian equities, hoping to make money regardless of whether the market is heading south. The fund will be adopting a fundamentally-driven, low net-exposure long/short strategy, with a "modest" net long of about 30% on average. The net exposure range is -20% to +40%, giving the managers enough flexibility to make the most of a market which can be volatile and rumour driven. The fund is to be managed in an active, fundamentally driven, stock selection style, with a relatively concentrated portfolio of between 50 and 80 names.

Halbis has a strong Asian pedigree it can draw on to achieve these objectives. Its parent, the HSBC group, has an established presence in India for starters, but on top of that it boasts a fund management team with excellent credentials in this market. Based in Singapore, investment director Sanjiv Duggal and fund managers Manish Srivastava and Viresh Mehta are part of a pan-Asia equity team with over $30 billion under management. Duggal himself is a long-time HSBC veteran, having joined the group in 1996 from Hill Samuel. He has been the lead manager of HSBC's successful GIF Indian Equity Fund since it was launched. Over five years since its inception, to the end of last year, the fund achieved a gain of 650.51%, and since inception on 1 March 1996, it is up 1336.69%.

Making a solid case for India

With big names spouting cautious sentiment regarding the Indian market (Citigroup's Kumar was warning investors in mid-March about surging wages, rising interest rates, and a slower growth in corporate earnings going forwards), a solid case needs to be made for India. Halbis still thinks there is lots of opportunity in a market with 150 decent publicly-quoted companies and the prospect of strong and sustainable GDP growth (projected at over 7% per annum for the next five years).Like other emerging economies, India is currently benefiting from a relatively young population and cheap labour supply, coupled with a rising urban middle class with increasing levels of personal wealth. Rising household incomes should see benefits feeding into the distribution sector, as well as life insurance, leisure, car manufacturing, retail, and entertainment sectors, amongst others. Duggal is also positive about the construction sector, materials, and engineering.

A long/short strategy could well be better suited than a simple long-only approach to the Indian market right now, as it would help reduce some of the negative elements that continue to plague a market that was one of the darlings of emerging markets investors last year. Although it is touted as the world's largest constitutional democracy, and the current government of Manmohan Singh has been seen as a stabilising force in national and regional politics, India still suffers from a slow-moving reform process, poor implementation of policy, and an insular approach to global politics. Its social infrastructure suffers from low literacy rates, limited education opportunities for the massive rural population, and a far from adequate healthcare system. The new-found wealth of the urban middle class is contributing to wider income disparities, both geographic and socio-economic, as well as creating the potential for social unrest. A general strike over water resources in Bangalore in February, for example, forced many technology and outsourcing companies to close their doors. Something similar happened in January, this time because of ethnic strife. And in October 2006 a public sector strike was sparked by a border dispute, and again forced many businesses, like Tata Consultancy Services and Wipro to shut down. Analysts are also drawing links between commodity shortages, inflation, and the climate of social unrest.

Despite the positive picture that some investors and fund managers have been painting of India of late, there are still problems bubbling under the surface that could emerge at very short notice, and spark a nose-dive in Indian stocks. Duggal is very aware of how much foreign money is already in the system, and how quickly global investors could sell out of India on the back of negative news. The market is a volatile one, and thus potentially rewarding for the short side of the portfolio.

Duggal's record of calling downturns has been partly down to his ability to generate such excellent returns in this market. He correctly anticipated the beginning of the Indian bull market in the summer of 2003 when he started calling the market a buy in April. He sold out in April 2004 following a national election result that gave no party an absolute victory. Sonia Ghandi's successful bid to build a coalition government to be led by Singh prompted Duggal to the decision that the change of government would not bring a halt to India's run-away economic development, and he bought back in.

Part of the talent required of a good India manager, particularly one with the ability to run a short book, is to balance an understanding of market and sector issues against the bigger macroeconomic and political picture. "You need to keep in touch with changes in government policy, election losses, price controls, and other top-down trends," Duggal explains. "Part of our top-down process involves watching how India integrates with the rest of the world, for instance proposed acquisitions by Indian companies abroad. Domestic factors are still a key driver, of course."

India is becoming an increasingly integral part of the global economy, with more multi-nationals relying on Indian labour forces than ever before. Unlike the last emerging markets boom in the mid-1990s, this time India is attracting far more attention, and is ranked alongside China and Russia in terms of the global interest it attracts. Indian companies are also going shopping abroad, and Duggal is mandated to be able to invest up to 10% of his fund outside India, for example to exploit the activities of big Indian firms like Tata Steel in the M&A market (Tata famously acquired steel and aluminium producer Corus in October last year for £4.3 billion).

Another example of a potential overseas investment is London-listed Vedanta Resources, which owns the India-based Sterlite Industries copper mining business. Apart from the ADR and GDR markets, there are also plenty of property funds with significant Indian interestslisted in Canada, Hong Kong, and the UK's AIM market.

Best ideas and pair-trading

Duggal approaches his portfolio from two directions: a best ideas approach (long and short) from the existing long-only strategy, coupled with long/short pair trades. The pair trades portion will typically have no net market exposure, while the 'best ideas' element will have varying degrees of net exposure, typically net long, except in times of market duress. "Unlike the leveraged, long-biased funds more commonly seen, our portfolio is typically hedged with a short book designed to be alpha generative," Duggal says.

The fund will obtain its shorts via single stock futures on the 150 largest listed stocks (worth over $7 billion a day in terms of trading volumes), as well as the $25 billion in local stockbroker inventory, which covers about 500 stocks. Duggal likes to take top-down sector views, while at the same time using a bottom-up stock-filtering process of identifying the stocks which will best represent his exposure to a given sector. Part of the reason his approach works in this market is because India is big enough to have a diverse range of sectors, and enough listed companies in each sector to give him the range he needs to choose from. "The key thing here is diversity," he says. "India has one of the broadest sector spreads – the top two sectors represent 41% of the market cap. For most emerging markets, that's over 50%. We also have a wide range of companies to choose from, with 130 that have a market cap above $1 billion."

The Halbis team is already cognisant of the large Indian stocks: the real alpha is generated by making effective sector decisions and then identifying the suitable trades to isolate those views, as well as putting on effective pair trades, of course. "Right now we favour value sectors," says Duggal. "Metals have low valuations, but are globally competitive. Over time we will get value from the steel and aluminium industries. Pharmaceuticals have also fallen sharply in the recent correction."

As a long/short manager, of course, it will also be important to pick up on the negative stories in the market, and Duggal has already been looking closely at the financial services, petrochemicals, and automotive sectors with a view to building his short book. Running long/short also allows him to capitalise on those downward market trends which previously would have seen him simply reducing his market exposure. This may stand him in good stead this year.

"Going forwards, India will be more volatile," he says, "probably flat to marginally down from its position at the beginning of the year." With a results season every quarter, and big state elections adding volatility (the Congress Party took a beating at the polls in two state elections recently, and Uttar Pradesh goes to the polls as this issue goes to print), there will be plenty of market movement to keep Duggal and his team busy.


There are perhaps two testaments to the following Duggal's expertise has generated in the investment community in the last decade. One is the long list of awards his fund has walked away with, from the likes of Lipper, CNBC, Asian Investor, Standard Chartered, and the South China Morning Post. The other is the fact that Halbis, which seeded the fund with its own money (as well as that of the fund's management team) as part of its standard launch procedure, confidently expects the fund to shortly soft close with $300 million; it launched on 2 April this year. A hard close level at $500 million has also been set. Thus, investors still positive about India had best act quickly if they are going to retain Duggal's expert services.