Value stock picker Bill Nygren’s firm just made a surprising bank pick

The Oakmark International Fund is one of the few actively managed mutual funds that has been able to keep up with Vanguard index funds in the race for assets. Last year Oakmark International was among the top 10 funds for new flows — 6 of the top 10 were Vanguard funds. The $43 billion Oakmark International Fund took in near-$10 billion in assets in 2017. The reason for its success in an era of index fund dominance is simple: It is the No. 1 ranked fund by performance in its foreign stock category over the past 10-year and 15-year periods, according to Morningstar.

“Private-sector banks are well positioned to benefit from this growth,” said Nygren, who makes a clear distinction between faster-growing and better-managed private banks and highly leveraged, poorly managed and technologically outmoded, state-owned public banks. “India’s public-sector banks face considerable obstacles, including bureaucratic priorities, low capital levels and meager investments in technology.”

While the public-sector banks in India currently hold 70 percent market share, Nygren expects “the private banks’ recent share gains to accelerate in the years to come.”

Although smaller than private peers HDFC Bank and ICICI Bank, Axis, with “its diversified business (45 percent retail, 40 percent corporate, 15 percent small- and medium-sized enterprises) and strong distribution platform,” is well positioned to grow its business by capitalizing on its recent infrastructure spending, he noted.

Baron’s Emerging Markets Fund (BEXFX) started buying HDFC Bank in March 2017. The middle of last year saw an increasing number of big mutual funds make bets on India’s private banks, including the Goldman Sachs Emerging Markets Equity Fund (GIRMX), Morgan Stanley International Opportunity Fund (MIOLX) and the T. Rowe Price Global Growth Fund (RPGEX) — which has a longer history than most buying Indian bank stocks. Baron has 1.39 percent of its portfolio in HDFC and an additional 1.19 percent in another private player, Kotak Mahindra Bank.

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Since assuming office in 2014, Indian Prime Minister Narendra Modi has made sweeping changes, including digitization, tax reforms and ease of doing business, to make India more attractive to foreign investors and businesses. A slew of measures have been taken to bolster India’s banking sector, too. Capital infusion, tech innovation, biometric identity card and, arguably the biggest of them all, Pradhan Mantri Jan–Dhan Yojana (meaning Prime Minister’s People’s Wealth Scheme), a financial inclusion program that has so far brought more than 300 million unbanked people, and account deposits worth $10 billion, into the fold of India’s formal banking system as of October 2017, according to local media reports.

These positive structural changes, which led Moody’s to upgrade India’s credit rating last November, appear even more attractive against the backdrop of India’s fast-growing economy. The Indian government claims the country’s economy is set to become the fastest-growing major economy, bouncing back from last year’s demonetization and messy introduction of a nationwide goods and service tax, events that proved to be detrimental to the nation’s economy.

The Indian stock market has been booming overall.