The Result: Tilting Greater Exposure to Lower P/E Stocks
• Approximately Two-Thirds of EPI’s Weight Is in Stocks Below the Median P/E Ratio of the MSCI India Index: The median P/E ratio of the MSCI India Index is 21.38x. As EPI tracks the return of its underlying Index, it is apparent that it is positioned more heavily in less expensive corners of India’s equity market. The P/E ratio distribution of the MSCI India Index is VERY different with more than 50% of its weight in stocks with P/E ratios above this same median value.4
• Approximately One Quarter the Exposure to Companies with Negative Earnings: We think this is remarkable, in that EPI had 233 holdings as of March 31, 2015, and the MSCI India Index had 65 constituents as of this same date. It may be surprising to learn that an investor can venture into exposure to small cap companies without necessarily needing to sacrifice exposure to those firms that are generating profits.5
The Importance of Managing Valuation Risk in India’s Equities
There are a lot of reasons for excitement surrounding India, and there is little question that the market has great potential. However, we always find it important to remind people that managing valuation risk is one of the single most important things to do in any equity market. We believe that EPI is a tool designed with that potential in mind.
1Refers to the performance of the MSCI India Index from 3/31/2014 to 3/31/2015, sourced from Bloomberg.
2Refers to the performance of the MSCI Emerging Markets Index and S&P 500 Index from 3/31/2014 to 3/31/2015, sourced from Bloomberg.
3Source for bullets: Bloomberg. P/E ratios measured on percentage change basis from 3/31/2014 to 3/31/2015.
4Source for bullet: Bloomberg, with data as of 3/31/2015.
5Source for bullet: Bloomberg, with data as of 3/31/2015.
Important Risks Related to this Article
High double-digit returns were achieved primarily during favorable market conditions. Investors should not expect that such favorable returns can be consistently achieved. A Fund’s performance, especially for very short time periods, should not be the sole factor in making your investment decision.