The top-performing hedge fund focused on India isn’t scared by equity valuations that are the most expensive in 10 years and predicts Asia’s third-largest economy will have seven good years in the next decade. Rahul Khanna, chief investment officer at Habrok Capital Management LLP, said his fund is betting on the long-term potential of the economy, which will begin to benefit next year from the government’s crackdown on black money and a nationwide sales tax. Last year’s cash ban and the goods and services tax introduced July 1 are expected to widen the tax base, while the latter should also make it easier to do business.
“India is a long-term structural story,” Khanna said in an interview. “We expect seven good years in the next 10 years, but it is hard to predict which years will be bad. This year’s growth was impacted by demonetization and the GST. There are no such headwinds next year.”
Khanna’s Habrok Capital India Equity Fund returned 42 percent this year through August, compared with 24 percent on average for its peers, becoming the best-performing long-short equity hedge fund with a mandate to invest in India, according to Eurekahedge. It was third best among 264 long-short equity hedge funds with Asian mandates, the data show.
Holdings in insurers, consumer-finance companies and fashion retailers helped the fund beat its peers in 2017, London-based Khanna said.
The benchmark S&P BSE Sensex gauge lost 0.6 percent in a fifth day of declines on Monday, set for the longest streak in more than a month.
Here are the highlights from his interview with Bloomberg News:
What is your fund’s investment strategy?
“We buy structural growth companies which have low penetration, are run by focused competent entrepreneurs and do not require too much capital.” The fund is, for example, bullish on agricultural chemicals as usage — or yield per acre — is still very low in India. Khanna usually takes a five-to-10-year view and ignores short-term swings Top 10 holdings have seen very little churn since January 2016, he said.
How do you find Indian equity valuations?
“Indian markets were never cheap but our belief is that if you hold for a long period of time you make money.” Khanna isn’t concerned about the recent slowdown in economic growth as the nation has “ strong demographics” and will benefit from lower borrowing costs and reforms including the linking of welfare benefits to a biometric identity card. “There is not much room for valuations to go up. However, there is still some tailwind for interest rates, which has the potential to boost local flows.”
What are you buying?
Khanna’s fund is buying industrials, keeping in mind penetration and market position. “We’ve bought a leading industrial abrasives and sandpaper company. We are adding a spirits maker as short-term headwinds, like a ban on liquor sale near highways and in the Bihar state, have made prices attractive. We are buying shares of a crop protection and fertilizer company. We will also add to beverages and some special situations.” Khanna said he likes insurance firms as he expects premiums to climb. The average in India is at 65 basis points, compared with more than 3 percent in the U.S.