India is not a country whose investment potential immediately impresses.
Reforms announced in 1991, though designed to move from a centralized, Soviet-inspired economy to a more market-driven one, have bogged down in implementation. While dramatic by Indian standards -- which is to say, when measured against 45 years of economic mismanagement -- they're less so by outside measures.
Socially, too, India remains a basket case. As recently as 1997, the World Bank estimated about 328 million of India's population of nearly one billion still lived in poverty. More than half are illiterate.
So why would anyone invest in India? It's probably a question that unitholders of the $45.3-million 20/20 India Fund have been asking themselves. At least until recently.
After years of unimpressive returns -- dipping as low as minus 46.2 per cent in 1995 -- the fund has recently come to life.
For the year ended March 31, 20/20 India was up 48.5 per cent, making it the top performer of Asian and Pacific Rim funds, which fell an average 0.6 per cent.
A recovery in the making? Not quite, says manager Jay Mitra of London-based Chescor Ltd.
"At a macro level, India is still pretty unexciting." The fund's performance, he says, reflects opportunities at the micro level -- in individual companies and industries that aren't particularly connected to India's macroeconomic travails.
"We've been refocusing the portfolio on industries such as information technology, health care and pharmaceuticals, and consumer products, which are the sectors where we see the future," he says. "Even if the government continues its piecemeal reform, with bits and pieces here and there, from time to time, as and when, these companies are growing at 20 per cent or more a year."
Ironically, India's long-standing isolationism and protectionist ways, though much criticized by would-be foreign investors, shielded it from the full brunt of the Asian crisis, notes Peter Brewster, editor of the Mutual Fund Adviser.
And investors seeking diversification in developing markets, he suggests, might find what they're looking for -- with significant risk -- in the 20/20 fund or another more recently arrived play, the $1.5-million Excel India Fund.
"The 20/20 India fund has seen some horrible price drops since it first came on the market at about $5," says Mr. Brewster. "But at its current price [under $2], it may be a low-cost way to diversify in a market that is disconnected from anything that happens in North American markets."
Of course, that's the case only if the fund's returns remain strong. Mr. Brewster points to India's burgeoning software industry as one potential source of growth. And both 20/20 India's Mr. Mitra and Birla Capital International AMC Ltd., which manages the Excel India fund, appear to agree.
A big holding of both is NIIT Ltd. Mr. Mitra expects NIIT, which makes up 10 per cent of his fund, to continue to contribute to gains.
"It's India's biggest training company, which runs franchised schools to teach computer programming. People are willing to pay a lot for their courses," Mr. Mitra says. "And a few years ago, they began recruiting their own graduates and developed their own software business. They're now an international player and expanding their schools to other countries in South East Asia and Africa."
Satayam Computer Services Ltd., in which he also has 10 per cent, is another technology success story. It offers programming services to clients around the world. Satayam has begun providing Internet service, a business growing rapidly in India.
An Indian Internet stock? It's almost as unusual as an Indian industry in which the government doesn't have its fingers. Yet that's the case in information technology.
"It's succeeded all the more because the government has left it alone," Mr. Mitra says. "It has a strong industry association that keeps the government out when it doesn't want help and gets incentives when it does."
The industry got one of those boosts in last February's budget. Concessions favouring software companies, offering foreign investors more latitude to invest in industries such as insurance, and lowering taxes for mutual fund unit holders, were viewed by investors as evidence India is renewing its program of reforms.
Indian markets soar on such news. In three days following the budget, the Mumbai (Bombay) market rose 15 per cent, giving Mr. Mitra's portfolio a lift. He expects other reforms to benefit the consumer products, health care and pharmaceuticals industries.
In those sectors, Mr. Mitra favours Indian subsidiaries of multinational companies such as Hindustan Lever Ltd., a unit of the Unilever group, in which he has a 5.7-per-cent stake. "Interestingly, a lot of the multinationals have not been very well run in India," he notes. "But the parents are waking up. They have tremendous marketing power and assets in terms of brands. And India is a huge market."
Typical of the impact they can have is the success of Danone SA, a French food-processing company that introduced branded milk products in India. "In India, nobody was selling milk that way and they've done very well." Hoping for similar results, he owns Britannia Industries, a Danone biscuit-making subsidiary.
Mr. Mitra's enthusiasm for multinational pharmaceutical companies with Indian subs -- such as Glaxo Holdings PLC, which he holds -- stems from India's promise to honour product patents by 2005. He believes that will encourage many multinationals to introduce brand-name products.
"Companies like Glaxo already have operations in India," he observes. "Being able to introduce new products with a strong brand name when manufacturing is already set up can be profitable."
Of course, having products means nothing if the market hasn't the money to buy them. But Mr. Mitra points to rapidly growing motorcycle sales as evidence of a nascent middle class of consumers.
His fund's investment in motorcycle manufacturer Hero Honda Motors Ltd., the Indian subsidiary of Japan's Honda Motor Co. Ltd., has done well so far.
While Mr. Brewster is not enamoured of 20/20 India's 10-per-cent penalty for investors who redeem within three years of buying -- a restriction Excel India doesn't have -- he does see reason to consider one of these funds.
"For one thing, they're independent of the Asian problem," he observes. "As a diversification investment in a developing market right now, I'd rate it [India] above China, Korea, and most of the other places in South East Asia."