Matthews India avoids oil, goes with health care

Sharat Shroff's Matthews India Fund performed better than peers during the biggest sell-off in Indian equities in three decades by investing in health care and avoiding oil and gas stocks.

India's stock market dropped as much as 40 percent from a high on Jan. 8 before regaining ground in the past month. Interest rates reached a seven-year high, hindering economic growth. Inflation soared in the South Asian nation, which depends on imports for about 70 percent of its energy needs, as oil prices rose 65 percent in the past year.

"Steady growers in the health-care and consumer-staples space held up better" amid the plunge in Indian shares, Shroff said in an interview from the San Francisco offices of Matthews International Capital Management. "We are not trying to call a bottom, as there could still be some pain to unfold."

The $708 million fund fell 3.9 percent in the past year (through Aug. 8) compared with the average 19 percent slump of the other three U.S.-based funds that invest in India, Bloomberg data show. It also beat funds that invest in Asia, excluding Japan, which fell 13 percent, according to Morningstar in Chicago. Matthews India has won with picks such as Sun Pharmaceutical Industries, which had gained 58 percent.

The Matthews fund, started in November 2005, has a one-year Sharpe ratio of -0.26, compared with a -0.45 ratio for funds that invest in Asia outside of Japan, Morningstar said. A higher Sharpe ratio indicates better risk-adjusted returns.

"Matthews' overall expertise in Asia is comforting," Morningstar analyst Bill Rocco said. The company manages $9 billion in Asian stocks. "Single-country funds are risky, but if you must own one, this is a good choice."

Matthews India is co-managed by Shroff and Andrew Foster. They've stayed away from energy stocks, saying that such companies are vulnerable to global price swings beyond their control.

About 4.7 percent of the fund's assets are in energy companies, compared with an 18 percent weighting in its benchmark Bombay Stock Exchange 100 Index. The managers held 13 percent of assets in health care, compared with 4.2 percent for its benchmark.

Apart from Matthews International, U.S. managers of India-focused stock funds include Eaton Vance in Boston; New York-based JPMorgan Chase; and EM Capital Management, which has offices in New Delhi, New York and Washington, D.C.

Franklin Resources, the manager of the Franklin and Templeton mutual funds, opened a mutual fund in February that is similar to the product offered in Luxembourg.

Purav Jhaveri and Stephen Dover co-manage the Franklin India Growth Fund, which has gathered more than $50 million since its inception earlier this year. Inflation and political uncertainty will drag on Indian stocks for at least six months, Jhaveri said.