New Star chairman John Duffield says setting up a joint venture with India’s biggest private company could save it up to 15 years groundwork in the Indian market.
Tata Group has a 140-year lineage dating back five generations to its founder Jamshedji Tata in 1868. It now has operations across 85 countries, with 98 companies across seven business sectors.
Duffield says investing in India has been one of his priorities for some time, behind improving performance on the UK desk.
He says: “Everybody has heard of Tata and to me it is the greatest name in India. We had a mutual friend and when she mentioned the group, I thought there was no better name or group to do a joint venture with.”
Tata Asset Management chairman Farrokh K Kavarana has a similar opinion of New Star Asset Management. He says the group’s rapid growth since it began trading in 2001 makes it an ideal partner for launching an Indian equity vehicle, pencilled in for June.
Duffield says: “This has been a year in the works, with preliminary discussions followed by regulatory discussions and the regulatory process surrounding the launch of the fund.”
The fund will be domiciled in Luxemburg and London, meaning two sets of regulators.
New Star managing director of operations Stewart Cazier says: “When Indian listed and unlisted securities are sold by UK funds, within 12 months the fund is liable to Indian capital gains tax. This is not the case for Luxemburg funds, where more tax-efficient structures are possible.
“A UK fund is either burdened with the tax charge for selling the security or the fund manager is constrained in his stock selection, neither of which is the most attractive option.”
Tata Asset Management managing director Ved Prakash Chaturvedi says: “The Indian economy has grown by over 8 per cent recently and it is a domestic-driven growth story with a big population that is consuming aggressively. There has been some slowdown but growth is still relatively good compared with the rest of the world.
“The upside is limitless. Our expectation is that Indian companies will keep growing while Indian domestic savers are putting money into Indian equities. At present, those savers only reach about 5 per cent market penetration and with that growth combined with overseas interest, India is definitely in the sweet spot and the next 10 years are a great opportunity in the country.”
Kavarana says: “There are a whole range of industries classed as infrastructure where there will be massive opportunities. Information technology also continued to grow past the dotcom bust in the US and continues to show steady growth. We have seen some damage to banks but not on any grand scale following the sub-prime problems.”
Duffield has made no secret of his desire to move into emerging markets, which has been partially vindicated by the strong growth of the heart of Africa fund launched towards the end of 2007.
He says: “I think there has been a real change in the world in the past two years but it has been foreseeable for a long time that emerging markets would overtake the more established Western markets.
“The shift of power from West to East means the West needs to invest in these countries as I see this as a trend that is largely irreversible.
“For now, India is the focus but I think that China is something we would like to do something with in the future although I feel stronger on the India story.”
Kavarana does not rule out a move into the UK asset management market for Tata but says it is something the firm has yet to take seriously.
He says: “I expect most asset management companies are pretty highly valued and we do not wish to make any predatory move. We have grown in India from nothing to the eighth biggest asset manager and that organic growth is something we would like to replicate when the opportunity suits us.”
New Star is not the first fund management company to move into Indian investment. Fidelity, Neptune and most recently Jupiter have funds in the region while the oldest offering, JP Morgan Indian investment trust, has grown by 900 per cent since launch in 1994.
Duffield says New Star could have launched an in-house India fund but it would have taken years to catch up with Tata’s expertise. He says: “We could have developed our own asset management business in India and that may have taken us 10 or 15 years but I would much rather tap into an established company. If I were to consider a joint venture of this ilk again, I would only do it with a firm that rivals the Tata’s expertise. I hope this leads on to other things as it is a massive development for us and I will be placing my money into this fund to back up my faith in the Indian market.”
The prospects for India are well documented. It has a young and growing population with no pension problems and a burgeoning middle class who are keen to buy the luxuries in life. Average salaries are going up and huge amounts are being spent on infrastructure.
GDP growth is strong and although the markets are relatively expensive, earnings growth generally has kept pace and justified valuations. It is one of the high growth places to invest for the next few decades although it is obviously higher risk.
Not having met Tata, it is difficult to comment directly on its investment management capabilities. However, it is one of the biggest and best known Indian companies. It is an interesting development for New Star to outsource management but if you have no internal capability it makes sense. There may be a glut of new Indian funds over coming years.