Offshore India Fund Spy

Transcription

1 Offshore India Fund Spy Year-End Edition (December 2011) Dhruva Raj Chatterji, Senior Research Analyst, Morningstar India

2 Contents: This report is intended to provide insights into performance, estimated flow, and net asset trends for offshore funds focused on the Indian market (or Indian securities ). An offshore India fund is one that is not domiciled in India but invests primarily in Indian markets. We have also included the asset flows of large funds with significant allocations in Indian stocks. All figures are for the year 2011 unless otherwise noted. The report is divided into three main sections: Asset Flows and Assets of India-Focused Offshore Funds We discuss the fund flows and asset trends of India-focused offshore funds belonging to the Morningstar India equity global category. We analyze two major universes where India-focused funds are available: Europe open-end funds and exchange-traded funds and Japan-domiciled open-end funds. The coverage of funds for the two universes is as follows: Europe open-end funds and ETFs (available for sale): 88 primary funds (which is a fund's oldest share class) and 278 share classes. Japan open-end funds (domiciled): 30 primary funds and 30 share classes. Asset Flows of the 30 Largest Offshore Funds with Partial Allocation to India We evaluate the fund flows of 30 offshore funds with the largest allocation in Indian stocks that are not classified as Indian funds in Morningstar s categorization system. Some of these funds, due to their sheer size, are important contributors of fund flows into India, even if they only have a partial allocation to the country. Please refer to methodology section for computation of fund flows into India. Performance of India-Focused Offshore Funds In this section we evaluate the performance of India-focused offshore funds in our database. We take a look at the ten best- and worst-performing India-focused offshore funds during the year, and also narrow down the performance of the 10 largest India-focused offshore funds. We also review how key international markets fared during the quarter. All performance figures of the funds are denominated in U.S. dollars. The coverage universe for this section is 166 primary funds (oldest share class) and 484 share classes.

3 Section A: Asset Flows and Assets of India-Focused Offshore Funds Key Takeaways: Total Universe: 118 primary funds and 308 share classes During the year 2011, India-focused offshore funds available for sale (AFS) in Europe registered an outflow of 2.3 billion, which even tops the outflows registered in the year 2008, when the financial crisis was at its peak.. India-focused offshore funds in Europe were not spared from the risk aversion that gripped investors globally during the second half of The total net assets of India-focused offshore funds AFS in Europe dropped by almost 40% during the year 2011, to close at 14.9 billion the lowest level in two and a half years. Huge outflows and market depreciation contributed to the significant fall in assets. The sharp fall in the rupee also dragged down the performance of these funds, leading to outflows. For the year 2011, HSBC GIF Indian Equity registered the biggest estimated net outflow: 935 million, or almost 18% of beginning assets (also known as organic growth rate). The fund also lost its status as the largest offshore India fund, with Aberdeen Global Indian Equity surpassing its assets at the close of the year Aberdeen Global Indian Equity emerged as the largest offshore India-focused fund at the end of 2011, despite its assets dipping by 25% during the year. However, its market share has increased considerably by almost 28% in the past year, benefiting from the large drop in its competitor fund s assets. Hardly any funds registered notable inflows during the year. A small fund, Danske Invest India, registered the highest net inflow from Europe-- 52 million over one year. Offshore India-focused equity funds domiciled in Japan recorded outflows of 64 billion, in the year In 2010, India-focused offshore funds in Japan had registered record outflows of 141 billion. The total net assets of offshore India funds in Japan almost halved to about 387 billion at the close of from a year back. This is the lowest level of assets for these funds in over 6 years. In 2011, only 6 of the 39 offshore India equity funds domiciled in Japan registered a net inflow. T&D India Mid-Small Equity Fund recorded the biggest inflow of billion, the majority of which came in the first quarter and the third quarter. PCA India Infra Open recorded the biggest net outflow from Japan of billion in 2011, or 19% of its beginning assets

4 Europe Open-End Funds and ETFs Universe: 88 primary funds and 278 share classes Yearly Estimated Net Flows (ENF) and Total Net Assets (TNA) of Offshore India Equity Funds India-focused offshore funds available for sale (AFS) in Europe continued to witness net outflows of about 495 million during the last quarter of In the previous quarter, these funds had registered the biggest quarterly net outflow of about 1.1 billion, since the beginning of 2008 (the starting point for Europe flows data in our database). This brought the cumulative net outflow for the entire year to 2.3 billion, which even tops the outflows registered in the year 2008, when the financial crisis was at its peak. However, in the years 2009 and 2010, these India-focused offshore funds from Europe had recorded healthy inflows of 2.2 billion and 1.8 billion respectively. India-focused offshore funds in Europe were not spared from the risk aversion that increased among investors globally during the second half of European investors fled from emerging-markets funds in the last two quarters of the year. As per Morningstar Asset Flows data, among all open-end funds and ETFs available for sale in Europe, the Morningstar Global Emerging Markets Equity category recorded a net outflow of 4.4 billion during the third quarter; followed by another outflow of 1.5 billion in the fourth quarter. BRIC focused funds also registered outflows in these two quarters. The total net assets of India-focused offshore funds AFS in Europe dropped by almost 40% during the year 2011, to close at 14.9 billion the lowest level in two and a half years. Huge outflows and the fall in equity markets contributed to the significant fall in assets. However, 2010 saw consistent quarterly growth of total net assets among offshore India funds in Europe. For the full year 2010, assets grew by 44%. The total net assets of these funds had dipped to around 7 billion in Q1 of 2009, during the financial crisis.

5 Five Top and Bottom Offshore India Funds by Estimated Net Flows in the Fourth Quarter of 2011 and the Past Year: In the fourth quarter of 2011, HSBC GIF Indian Equity registered the biggest outflow million-- making it the seventh consecutive quarterly outflow for this fund. The performance of this fund, with a 2-star Morningstar star rating and a Bronze Analyst rating, has dipped considerably in recent times. In the fourth quarter, it delivered a return of % compared to the MSCI India Index s %. Therefore it ranked 150 th among 161 offshore India-focused equity funds in our database, for that period. The third largest offshore India fund viz. FF India Focus (with a 3-star star rating and Neutral Analyst rating) registered the second-greatest outflow million during the quarter. Meanwhile, a relatively small fund, Comgest Growth India, recorded the highest net inflow-- 6 million during the quarter. For the full year 2011, also HSBC GIF Indian Equity registered the biggest estimated net outflow: 935 million, or almost 18% of beginning assets (also known as organic growth rate). The fund also lost its status as the largest offshore India fund, with Aberdeen Global Indian Equity surpassing its assets at the close of the year. Next in line was JP Morgan Fund JF India Fund, which recorded a lower net outflow of 345 million (or 14% of its beginning assets) over one year, primarily because of a 161 million net outflow in the first quarter of Hardly any funds registered notable inflows during the year. A small fund, Danske Invest India, registered the highest net inflow-- 52 million (or close to 87% of beginning assets)--over one year. This Morningstar five-star rated fund was among the top performers during the year, delivering a return of -26% compared to MSCI India s -38%.

6 10 Largest Offshore India Equity Funds Available for Sale in Europe Net Assets ( Mil) Market Share (%) Name Dec-11 Dec-10 Dec-11 Dec-10 Mkt Sh % Chg Aberdeen Global Indian Equity Fund 2,598 3, HSBC GIF Indian Equity 2,258 5, (26.74) FF - India Focus 1,694 2, JPMorgan Funds - JF India Fund 1,420 2, (1.46) Franklin India 883 1, Lyxor ETF MSCI_India 842 1, (14.43) PineBridge India Equity First State Indian Subcontinent Fund Jupiter India Fund BNPP L1 Equity India Source: Morningstar Direct # BlackRock Glb India Fund has been excluded because all share classes assets have not yet been captured for Dec 11 HSBC GIF Indian Equity s assets fell by about 57% in 2011, and at the end of the year, it no longer remained the largest offshore India-focused fund. Its market share dropped by almost 27%, from 21.51% to 15.76%, as the fund registered outflows of 935 million. It has been one of the bottom performing offshore India funds during the past year, ranking in at 143 rd place among 149 offshore India-focused equity funds in our database. The fund delivered a return of % in 2011, compared with a return of -38% delivered by the MSCI India USD Index. Aberdeen Global Indian Equity Fund emerged as the largest offshore India-focused fund at the end of 2011, despite its assets dipping by 25% during the year. However, its market share has increased considerably by almost 28% in the past year, benefiting from the large drop in its competitor fund s assets. The fund also registered minimal outflows of 77 million (or only 2% of beginning assets) during the year. A year back, HSBC GIF Indian Equity managed 5.26 billion, which was almost 52% higher than the Aberdeen fund s assets at that time. The Aberdeen fund is a Morningstar 5-star rated fund, and has delivered a return of % in 2011, ranking 10 th among 149 offshore India-focused equity funds in our database. It was a top quartile performer in 2010 as well. Among the largest 10 offshore India funds in Europe, BNPP L1 Equity registered the least fall in assets (in percentage terms) of only about 8% in As a result the fund s market share rose by a handsome 56%, from 1.06% to 1.64%, in the past year. The fund registered lower outflows of 37 million (million or billion) during the year. It did not fare too badly during the year, delivering a return of -32%, compared to the MSCI India s -38% over the same period. The fund is a Morningstar four-star rated fund.

7 Japan Open-End Funds (Domiciled) Universe: 30 primary funds and 30 share classes Yearly Estimated Net Flows and Total Net Assets of Offshore India Equity Funds: Offshore India-focused equity funds domiciled in Japan continued to record outflows, with the net outflow for the last quarter of 2011 increasing to 25.5 billion, from an outflow of 15.5 billion in the previous quarter. This brings the net outflow of India-focused equity funds from Japan to 64 billion in the year In 2010, India-focused offshore funds in Japan had registered record outflows of 141 billion. Morningstar Fund Flows data also shows that in the year 2011, Japanese investors in general pulled out money from world bond funds, emerging market bond funds, world equity funds, and emerging-markets equity funds. The Morningstar World Ex Japan Bond and World Bond categories in Japan registered net outflows of 1,063 billion and 832 billion respectively in Meanwhile, the Morningstar Emerging Markets Equity Single Country and Emerging Market Equity Diversified categories in Japan recorded net outflows in excess of 200 billion each in Japanese investors instead poured money into World Real Estate Investment Trusts (REITs) of more than 1 trillion during the year. The total net assets of offshore India funds in Japan almost halved to about 387 billion at the close of from a year back. The sharp fall in assets was led by the fall in Indian stocks, and coupled with large outflows from these funds. This is the lowest level of assets for these funds in over 6 years, with assets now down by more than 70% from their peak of 1,400 billion at the end of year 2007.

8 Five Top and Bottom Offshore India Funds by Estimated Net Flows for the Fourth Quarter of 2011 and in the Past Year: All offshore India funds in Japan recorded outflows during the last quarter of The largest India focused fund in Japan, viz. PCA India Equity Open registered the biggest net outflow of 4.55 billion during the quarter. The fund also recorded net outflows in the second and third quarters of It s sister fund, PCA India Infra Open was next in line, and registered a net outflow of 2.75 billion in Q4 of 2011, after seeing a similar outflow in the previous quarter too. In 2011, only 6 of the 39 offshore India equity funds domiciled in Japan registered a net inflow. T&D India Mid-Small Equity Fund recorded the biggest net inflow of billion, the majority of which came in the first quarter and the third quarter. However, the fund recorded an outflow of about 1 billion in the last quarter of Morningstar data shows the fund s inception date as February Interestingly, it managed to avoid a large part of the market fall during the third quarter and emerged as the top performing offshore India fund during that quarter--by delivering a return of % (in USD terms), compared to MSCI India USD s %. HSBC India Open, which is the second-largest offshore India fund domiciled in Japan, recorded the second highest net inflow of 5.65 billion. However, this inflow was equivalent of only 5% of beginning assets (also known as the organic growth rate). The fund recorded a net inflow despite being one of the worst-performing funds during the past year delivering a return of -46% (in USD terms), compared to MSCI India USD Index s -38% return over the same period. PCA India Infra Open recorded the biggest net outflow billion--over one year, or almost 19% of its beginning assets. The fund has witnessed outflows in almost all the quarters since mid 2008, and its assets have now fallen by more than

9 80% since its peak at the end of Next in line was Nomura India Equity, which saw a net outflow of billion in 2011, or about 17% of its beginning assets. 10 Largest Offshore India Equity Funds in Japan Net Assets ( Bil) Market Share % Mkt Sh Name Dec-11 Dec-10 Dec-11 Dec-10 % Chg PCA India Equity Open HSBC India Open PCA India Infra Open (13.28) Nomura India Equity (4.68) Amundi Resona India Fund (6.10) Shinko Pure India Stock Fund BlackRock Ilndia Equity Fund (6.64) Shinsei UTI India Fund Deutsche India Equity Open Daiwa Dynamic India Eq Fund (12.71) Source: Morningstar Direct Assets of all offshore India funds from Japan shrank during the year Not a single fund registered positive asset growth. This was due to the large outflows from these funds and the overwhelmingly negative performance of the group. All the 10 largest offshore India funds in Japan saw their assets shrink between 45-50% during the year. PCA India Equity Open retained its spot as the largest offshore India fund in Japan, even though its assets fell by 44% in Even though the fund s assets fell considerably, its market share has grown by 7% during the year, indicating that assets of other funds would have fallen even more sharply. HSBC India Open also retained its spot as the second largest offshore India fund in Japan, despite its assets falling by 46% during the year. Here too, its market share actually improved during the year, albeit marginally. The 10 largest funds constituted about 84% of total net assets of all offshore India funds in Japan at the end of December Among the 10 largest funds, the one that saw the biggest drop in assets (in percentage terms) in the past year was PCA India Infra Open. The fund saw its assets plunge almost 55% during the year to 38 billion at the end of December This fund has registered the highest net outflow billion in 2011, or 19% of its beginning assets. Its market share continued to fall, and dropped from 11.33% at the end of 2010 to 9.83% at the end of 2011.

10 Section B: Asset Flows of 30 Largest Offshore Funds with Partial Allocation to India Methodology: In this section we evaluate the fund flows of diversified equity offshore funds with large asset allocations in India. We consider funds that do not belong to the Morningstar India Equity global category but still have a substantial investment in India. These funds, due to their sheer size, are important contributors of fund flows into India, even if they only have partial allocations to the country. We included only open-end funds and ETFs that are not domiciled in India but have some exposure to India in their portfolios. The oldest share class of the fund is used for the purpose of this analysis. We narrowed the field to the 30 funds with the largest exposure to India (in dollar terms) at the end of December 2011 and calculated their estimated net flows into India for the year We multiply the average India exposure of the fund during the quarter by estimated fund-level net flow to attain the total estimated flow into Indian shares. Analysis of Asset Flows into India during the Year 2011: India-focused ETFs and open-end funds domiciled in the U.S. registered net outflows during the year India-focused ETFs like WisdomTree India Earnings and ipath MSCI India Index ETN recorded outflows of $372 and $355 million respectively in Similarly, Matthews India Fund (which is an openend fund) had outflows of $436 million during the year. Among the 30 largest funds with a partial allocation to India, ishares MSCI Emerging Markets Index Fund saw the biggest portfolio outflow from India ($469 million) in This is a passively managed index fund that tracks the MSCI Emerging Markets Index, and the outflows for the entire fund topped $7 billion during the year. Therefore the India portion of the portfolio also registered outflows. The fund had been gradually increasing exposure to India for the first three quarters of the year, but cut its India allocation in the last quarter from 7.6% in September 2011 to 6.3% in December 2011 (in line with the reduced weightage of India in the MSCI Emerging Markets Index). The fund had the fourth-largest exposure to India (at an estimated $2.2 billion) at the end of The funds that registered the highest portfolio inflows into India during the year were mainly emergingmarkets funds domiciled in the United States. Morningstar Fund Flows data shows that American investors poured money into diversified global emerging-markets funds during the year, unlike European investors who pulled out money from emerging market funds. In the U.S., the Morningstar Diversified Emerging

11 Markets category registered inflows in excess of $21 billion during the year. Also, most of these funds cut down their India exposure over the course of the year thereby the portfolio inflows into India were primarily on account of the overall inflows into the main fund. As a result of that the India portfolio also registered an inflow. Amongst the 30 largest funds with partial allocation to India, the fund that recorded the biggest portfolio inflow into India during the year was a passively managed index fund named Vanguard Emerging Mkts Stock Idx at $524 million. The outflow for the entire fund during the year was almost $7 billion during the year, as a result of which the India portion also registered an outflow. The fund has the second-largest exposure to the country, at an estimated $4 billion at the end of Estimated Net Flows of 30 Largest Funds with Partial Allocations to India in 2011

12 Key Points: Section C: Performance of India-Focused Offshore Funds Universe for Performance: 166 primary funds and 484 share classes India was among the bottom performing markets during the year. The benchmark-sensitive index lost almost 25% (in INR terms), and the MSCI India USD Index closed with losses of almost 38% (in USD terms). The rupee weakened significantly during the year; falling almost 19% versus the dollar. This would have further hampered the performance of the offshore India funds during the year. In 2011, offshore India funds returned on average -36% (in USD terms), compared to a return of -38% delivered by the MSCI India USD Index. The sharp fall in the rupee helped the onshore India equity funds (domestic diversified equity funds) outperform the offshore India funds. In 2011, the difference in returns of onshore India equity funds and offshore India equity funds widened to its highest level in 9 years. Funds which were overweight on consumer defensive themes and underweight on financial and industrial sectors, outperformed during the year, and were able to restrict their losses. The top performing offshore India-focused equity fund in 2011 was India Value Investments Ltd., which delivered a return of % (in USD terms), compared to MSCI India s -38%. Three funds from First State Investments also made it to the list of top ten performing offshore India funds in 2011.The bottom-performing fund was an infrastructure-themed fund from Japan named HSBC India Infra Equity Open, which closed the year with huge losses of about -62% (in USD terms). Four of the bottom ten performing offshore India funds in our database in the year 2011 were from Japan. The rupee fell even more sharply against the Japanese yen in 2011 (by 25%), and this would have substantially affected the performance of offshore India funds domiciled in Japan. The erstwhile largest India-focused offshore equity fund, HSBC GIF Indian Equity A Acc was one of the bottom performing funds during the year, ranking at 143 rd place out of a universe of 149 offshore India equity funds in our database. The fund delivered a return of % in 2011, suffering from the large bets it took earlier on the real estate, industrials and energy sectors. Aberdeen Global Indian Equity emerged as the largest offshore India-focused equity at the end of It delivered a return of % in 2011, ranking 10 th among 149 offshore India funds.

13 Performance of Key International Markets (as of December 2011): Index Domicile Closing 30-Dec- 11 Jan- Mar Apr- Jun Jul- Sep 2011 Oct- Dec Jan-Dec (Full Year) United States DJ Industrial Average US 12, NASDAQ 100 US 2, S&P 500 US 1, Europe FTSE 100 UK 5, FSE DAX Germany 5, Euronxt Paris CAC 40 France 3, Asia Pacific KSE KOSPI Korea South Korea 1, S&P/ASX 200 Australia 4, FTSE/SGX STI Singapore 2, Nikkei 225 Average Japan 8, Hang Seng HIS Hong Kong 18, Shanghai SE Comp. China 2, BSE SENSEX India India 15, Other Emerging Markets BOVESPA Ibovespa Brazil 56, RTS RTSI Russia 1, Source: Morningstar Direct, Performance is in base currency. Global equity markets were hammered in 2011, with only 2 (that to only from the US) out of the 15 under review posting some gains for the year. It is also worth noting that 8 of these indices fell 15% or more due to the disheartening economic developments. Negative economic and other news flowed unabated, affecting indices the most in the third quarter (Jul- Sep) of the calendar year. But some positive developments toward the year-end made the final quarter the largest gaining period for several indices. India was among the bottom performing markets during the year, with its benchmark sensitive index posting losses of about 25%. Weak economic data, high interest rates, slowdown in corporate earnings and political issues took a toll on sentiments, and influenced foreign investors to largely stay away from the Indian markets during the year. The sharp depreciation in the Indian rupee (of about 19%) against the

14 dollar, was also a big deterrent for foreign investors. India s central bank hiked interest rates 7 times during the year, to control inflation, which had been above the 9% mark for most part of the year. Most central banks exercised tighter monetary policies for most of the year with the ECB and People s Bank of China raising rates to to cool off inflation, but hurting stocks in the process. However, later they had to ease policies in order to support flagging growth. Other emerging markets like China and Russia also fared poorly in Rating downgrades were rampant in 2011 with several Euro zone member ratings being downgraded. US was not spared either. Markets stooped mid-year due to an impasse between The White House and Congress on raising the nation s debt ceiling. And though it was later agreed upon, the delay cost the US its prized AAA credit rating, reduced to AA+, for the first time ever, by S&P. Equities also looked to European bond markets for cues with falls sustained on every rise in yields. The ECB had to restart its member-nation bond purchases towards the end of the year to support the downbeat sentiment. Due to the dire economic situation, there were expectations of a third round of quantitative easing (QE3) but markets were disappointed when none was forthcoming. Also, the ECB gave no indication it would aggressively increase its bond-buying programme. But 2011 was not all bad news for equities. Indices were boosted by the coordinated move by major central banks to make dollar funding cheaper for European banks. Specifically for Euro zone, a debt accord, in which European leaders boosted the region s main bailout fund to 1 trillion euros, also helped markets. Later in the year, European leaders agreed to a new deal in which they capped the European Stability Mechanism at 500 bn euros and decided to provide loans to the IMF to increase its funding ability. Formation of new governments in Italy and Greece (after the erstwhile Prime Minister surprisingly asked for a referendum on the EU bailout package) also boosted equities. A break in US congressional deadlock also lifted buying. Lawmakers in the House of Representatives and the Senate voted to temporarily extend a payroll tax cut by two months and agreed to begin negotiations on a year-long extension. The international markets performance section was contributed by Divyansh Awasthi, Senior Content Writer, Morningstar India.

15 Ten Best- and Worst-Performing Offshore India-Focused Equity Funds in the Year 2011 (in U.S. dollars) In line with the fall in international markets, Indian bourses witnessed a hefty fall in 2011; and were one of the bottom performing markets during the year. The benchmark-sensitive index lost almost 25% (in INR terms), and the MSCI India USD Index closed with losses of almost 38% (in USD terms). The rupee weakened significantly during the year; falling almost 19% versus the dollar. This would have further hampered the performance of the offshore India funds during the year. In 2011, offshore India funds returned on average -36% (in USD terms), compared to a return of -38% delivered by the MSCI India USD Index. Funds which were overweight on consumer defensive themes and underweight on financial and industrial sectors, outperformed during the year, and were able to restrict their losses. Banking and financial stocks fell heavily during the year owing to higher interest rates and concerns on deteriorating asset quality, while industrial stocks also took it quite heavily on their chin. Meanwhile, investors flocked to the safety of consumer defensive stocks (FMCG) amidst a volatile market. The BSE FMCG index was the only sectoral index from India to close in the green in 2011, with a gain of about 9.5% (in INR terms). The top performing offshore India-focused equity fund in 2011 was India Value Investments Ltd., which also happens to be a Morningstar 4-star rated fund domiciled in Mauritius. The fund managed to restrict a

16 large part of the market fall during the year, and delivered a return of % (in USD terms), compared to a return of -38% delivered by the MSCI India USD index over the same period. Three funds from First State Investments also made it to the list of top ten performing offshore India equity funds in These were First State Regional India, First State Indian Subcontinent II, and First State Indian Subcontinent A. All these funds also happen to be Morningstar 5-star rated funds, and one of them viz. First State Indian Subcontinent A also has a Bronze Morningstar Analyst rating. All these three funds delivered similar returns of about -23% (in USD terms) in 2011, compared to the MSCI India USD s -38%. A look into their portfolio shows that the funds were significantly underweight in financial stocks, while heavily overweight on consumer stocks. This would have helped to buffer these funds in the volatile markets of The bottom-performing fund was an infrastructure-themed fund from Japan named HSBC India Infra Equity Open, which closed the year with huge losses of about -62% (in USD terms). Another infrastructure fund from Japan viz. Okasan India Infras Related Eq Open was next in line from the bottom, delivering a return of -50% in Four of the bottom ten performing offshore India funds in our database in the year 2011 were from Japan. The rupee fell even more sharply against the Japanese yen in 2011 (by 25%), than against the U.S. dollar, and this would have substantially affected the performance of offshore India funds domiciled in Japan. The erstwhile largest offshore India fund viz. HSBC GIF Indian Equity, was also one among the list of bottom ten performers in 2011, delivering a return of -46%--substantially lower than the MSCI India index. The fund has seen huge outflows during the year, and its assets have got knocked down heavily too. Rupee Depreciation Hampers Performance of Offshore India Equity Funds in 2011 The sharp fall in the rupee during 2011, and especially in the last quarter of the year, took a toll on the performance of offshore India equity funds. The rupee fell by almost 19% against the dollar during the year. The difference in returns of onshore India equity funds (domestic diversified equity funds) and offshore India equity funds widened to its highest level in 9 years. Onshore India equity funds delivered an average return of % (in INR terms) in 2011, compared to an average return of % (in USD terms) delivered by the offshore India equity funds an outperformance of about 11%. The last time onshore India equity funds outperformed more was in 2002, when these funds delivered an average 18.20% return and outperformed their offshore cousins by a margin of 12.45%. Refer to Chart below for yearly comparison. It can be also seen that usually in the years when the rupee has depreciated significantly, the offshore India funds have typically underperformed the onshore India funds, as a result of the currency loss. Another example is the year 2008, when the rupee fell by more than 23% against the dollar. Returns of offshore funds lagged onshore funds by almost 8% on average in that year. Although an exception was the year 2002, when offshore funds lagged by a significant margin, but the rupee had not fallen as much. Also, on the

17 flipside, in the years in which the rupee appreciated significantly, offshore India funds typically outperformed their onshore cousins. The currency factor took an even more severe toll on offshore India funds in Japan, with the rupee sliding by about 25% against the Japanese yen during the year As a result many of the offshore India funds from Japan were among the bottom performers during the year. Performance of the Ten Largest Offshore India-Focused Equity Funds, in USD, as of December 2011

18 The erstwhile largest India-focused offshore equity fund, HSBC GIF Indian Equity A Acc was one of the bottom performing funds during the year, ranking in at 143 rd place out of a universe of 149 offshore India equity funds in our database. The fund continued with its bout of underperformance and delivered a return of % in 2011, compared with a return of -38% delivered by the MSCI India USD Index. This Morningstar 2-star-rated fund, which also has a Bronze Analyst rating, was a bottom-quartile performer in 2010 too although it managed to deliver top-quartile returns in Its poor performance in 2011 and 2010, has dragged down its trailing returns in the past five years to a dismal -5.59% (annualized), compared to the MSCI India Index s -2.34% (annualized) over the same period. It is also significantly more volatile than other peer funds and has secured a Morningstar Risk score of "High" over various time periods. Its underperformance has led to outflows from the fund in the past two years, with the exodus picking up pace especially in this year. The fund had taken large bets on the real estate, industrials and energy sectors, which dragged down its performance substantially. An interesting point to note is that HSBC GIF Indian Equity Fund is no longer the largest offshore India fund, with its assets tumbling over time, due to the massive outflows. Aberdeen Global Indian Equity emerged as the largest offshore India-focused equity at the end of At the end of 2007, HSBC GIF Indian Equity s assets had peaked out at about USD 9.5 billion. Since then, this flagship fund has lost about 70% of its assets through end However, over the same period, Aberdeen Global Indian Equity s assets actually grew by almost 20%, despite the dip in assets in As a result the gap between the assets of the HSBC fund and the Aberdeen fund had been closing down over the past few years, with the latter outstripping the former s assets by USD 0.44 billion at the end of year 2011.

19 Among the 10 largest India offshore funds, the top performer during the year was Aberdeen Global Indian Equity D2, which has now emerged as the largest India-focused offshore fund at the end of The fund delivered a return of % in 2011, ranking 10 th among 149 offshore India-focused equity funds in our database. The fund s overweight allocation to technology, consumer and auto stocks and its underweight exposure to industrials helped it to buffer its performance in the falling markets of This Morningstar 5- star fund has also impressed with top-quartile returns in Its good performance also stands over longer periods like 3 years and 5 years, over which it has managed to emerge among the top 5 performing offshore India equity funds. In the past 5 years (ended December 2011), the fund has delivered an annualized return of 4.47%, which stands substantially higher than the MSCI India Index s -2.34% (annualized). The bottom performer during the year, among the 10 largest funds, was a fund from Japan named HSBC India Open. The fund delivered a return of % in 2011, ranking 144 th among 149 offshore India-focused equity funds in our database. It had also delivered a bottom-quartile performance in 2010 and its trailing returns in the past 5 years stood at a dismal -8.22% (in USD terms) compared to an annualized % return delivered by MSCI India USD index over the same period. That makes it the second worst performing offshore India fund in our database over the period END-----