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Experts at odds on India's 'hidden gem'

Its economy is booming, but not everyone is sold on investing there, KEITH DAMSELL writes


The jury is out on India.

The country of stunning contrasts -- a booming middle class, yet one-quarter of the world's poor -- prompts mixed reviews from the investment community.

"India is a hidden gem. People are just discovering it," said Bhim Asdhir, president and chief executive officer of Excel Funds Management Inc. of Mississauga.

Yet Jim Rogers, a U.S. investment guru, described the country as the epitome of "bureaucracy, chauvinism and protectionism" in his 2003 travelogue Adventure Capitalist. Roads are poor, the electrical grid weak and its government unwilling to do business, he noted.

"A nice place to visit but that's about it," Mr. Rogers said in an e-mail interview.

The reality is somewhere in between, suggests Mark Mobius. The emerging markets expert manages more than $12-billion (U.S.) for Franklin Resources Inc. of San Mateo, Calif.

"You really have a dichotomy in India where, on the one hand, some parts of the country are in the Middle Ages and where some parts of the country are as advanced as any other in the world," Mr. Mobius said.

The country's best tech and drug firms are trading at lofty price-to-earnings multiples and bargain consumer-focused stocks are few and far between, he said.

Two engines are driving India's economy, expected to grow about 7 per cent annually this year and next. Hyderabad has become a centre of commerce for the software and drug industries. The region's economic development, meanwhile, is fuelling middle-class growth.

Each year, "it means another 25 [million] to 30 million people who are buying cellphones, computers, cars and motorcycles," Mr. Asdhir said. "There is a consumption boom and good companies are benefiting. Their profitability goes up and it's reflected in the pricing of the stock."

Indeed, the strong economy has helped drive the $62-million Excel India Fund to impressive double-digit returns. The fund has returned 35 per cent and 34 per cent for the 12-month period and three-year period ended June 30, respectively. Since its launch in 1998, the fund has returned an impressive annual average of 15.7 per cent.

Meanwhile, the Nifty Junior Benchmark Exchange Traded Scheme, an exchange traded fund on the National India Exchange (JBEES/IN) that tracks India's 100 most liquid stocks, was up a stunning 69.6 per cent for the 12 months ended June 30.

But getting exposure to the Indian market is difficult.

Excel India, along with two closed-end funds that trade on the New York Stock Exchange, are the sole India-dedicated funds available in Canada. In contrast, there are at least nine China-focused funds on the market. A survey of Canada's 10 largest international equity funds shows all have tiny weightings in India.

Rohit Sehgal, chief investment strategist at Toronto's Dynamic Mutual Funds Ltd., expects more India-focused funds will be coming to market. The manager of the $1.3-billion Dynamic Power Canadian Growth fund has about 7 per cent of the fund's assets in India.

"I think you are going to see pure India funds," he said. "Money flowing to that part of the world is going to continue. . . . This is a long-term trend."

Several fund managers interviewed were, nevertheless, a little leery of advising the purchase of India-focused investment funds and argue diversification is the best means to play emerging markets.

"How specific does an investor want to get?" asked Martin Hubbes, chief investment officer at AGF Management Ltd. Two years ago, the Toronto fund company merged the AGF India Fund with the AGF Emerging Markets Value Fund to diversify risk and improve returns.

Country-focused funds "are fantastic when the market's hot and they're really horrible when the markets not hot. There's nothing the manager can do about it," Mr. Hubbes said.

Edward Jones boss cleans up

Gary Reamey, the easygoing head of Canadian operations of Edward Jones & Co. LP, took home a cool $4.67-million (U.S.) in compensation last year. That's up a handsome 11 per cent from about $4.2-million in 2003.

Edward Jones of St. Louis, Mo., is not a public company, but it includes executive compensation figures for its top executives in filings with the U.S. Securities and Exchange Commission. Compensation at the private partnership includes a return on capital that the executives invested in the brokerage. The lion's share of Mr. Reamey's pay came from the $4.52-million he received from his ownership stake in the partnership.

The investment in the financial advice firm was a smart move. Mr. Reamey's compensation has climbed significantly in recent years. In 2002, he took home $3.14-million and in 2001, $2.21-million.

Newport mixes things up

In a financing twist, Newport Investment Counsel Inc. is applying the structure of a mutual fund to the income trust formula.

Operations of the Toronto wealth management firm, along with a mix of nine small businesses, are being cobbled together to create the Newport Partners Income Fund. Financial services will have a hefty weighting in the trust. In addition to Newport, hefty interests in money managers the Brompton Group and Morrison Williams Investment Management Ltd., both of Toronto, will be folded into the mix.

The team of 13 underwriters led by RBC Dominion Securities Ltd. expects to raise about $210-million. The annual yield of the $10 units will range from 8.5 per cent to 9.5 per cent annually. The offering, detailed in a whopping 405-page prospectus, is expected to close early this month. The trust's structure may sound unique but it's not unheard of. The operations of Calgary's Avenir Diversified Income Trust, for example, include oil and gas, real estate and financial services.

Creating a trust that owns a mix of diverse companies is easy; the trick is finding the right firms, said Jason Zandberg of Acumen Capital Finance Partners Ltd. "It's all about buying companies with good stable cash flows," the Calgary analyst said.

© 2007 The Globe and Mail. All rights reserved.

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