Boutique founder Matt Linsey has halved his exposure to India over the past quarter for fears of valuations running ahead of the long-term growth achievable under Narendra Modi.
In the latest update for the GAM Star North of South EM Equity fund, the Citywire A-rated manager said the country was now one of the largest underweights in the fund.
India has dropped from 8.8% of geographic exposure to 4.17% in the €189.5 million fund, which he runs on mandate for Swiss group GAM and replicates the strategy used at his boutique North of South Capital.
In his last two commentaries, Linsey said: 'Having been positive on the Indian market for almost two years, we have reduced our exposure significantly over the past three months.’
‘The key reason is valuations, which have reached levels that require very significant reform progress. While the manager expects continued reforms, these are unlikely to happen at the pace expected as Prime Minister Modi moves into his second year.’
This drop in exposure, which is now far below the MSCI EM (Emerging Markets) index weighting of 7.89%, has seen Linsey instead focus his attentions on markets such as Taiwan, Korea and China.
‘During the quarter we increased our exposure to Taiwan and Korea where valuations have become even more attractive. This is particularly true of Taiwan from a dividend perspective. The fund was also active in China,’ he said.
China is the largest country exposure at 20.02%, which is below the index weight of 24.8%. Meanwhile, Taiwan is the second largest position and a six percentage point overweight at 18.95% of the fund.
Linsey said these two markets could prove mutually beneficial in the future and this partly explained his strong stance.
‘We continue to see value in the Hong Kong market, and support remains from mainland investors. Looking further ahead, there is a possibility of Taiwan opening up its market to mainland Chinese investors.’
‘Given the very significant valuation discount, this could be a catalyst for strong performance in that market. Dividend yields in Taiwan are very attractive – the yield on the fund’s Taiwanese portfolio is around 5%.’
The GAM Star North of South EM Equity fund returned 17.19% over the three years to the end of June 2015. This compares to a rise of 12.7% by its Citywire-assigned benchmark, the MSCI EM (Emerging Markets) TR USD, over the same period.