FUND FLAVOUR

April 2017

Global Funds…

A study provided by Vanguard stated that 30%-40% of investors’ stock portion of their portfolio should consist of international stocks. Investors typically have a significant bias towards owning investments within their own country—this is known as home country bias—so by diversifying internationally, investors can gain exposure they would otherwise be neglecting. Furthermore, investing internationally adds both rewards and risks, including currency risks and taxation as debt funds, but it can add the much needed diversification to a portfolio, especially if their home country suffers a serious economic recession.

…still evolving

Global funds are still evolving in India. Assets under management of such schemes, which invest in global markets, have fallen by 30% in the two years to June 2016, according to data from ValueResearch, a mutual fund tracker. In the same period, total assets managed by Indian mutual funds rose 41.6%. The total assets managed under 41 such schemes is now Rs.2,567 crore, less than 1% of the total corpus of the mutual fund industry.

Great risks, great rewards

Several international funds, including gold-based funds, commodity-linked funds as well as US-based funds, have given good returns in 2016. In fact, as a category, international funds returned close to 16% last year. However, it is not a good idea to generalize the whole basket of international funds as one category, as different funds have vastly diverse themes.

There are three different kinds of international funds that asset management companies in India offer. The first is those funds that invest directly into global markets. Then there are those called as feeder funds that invest into an existing global fund and the third kind are fund of funds, which invest in several different international funds.

Another reason why returns in this category can be extremely divergent is the fund objective. For example, there are some funds that invest based on a particular region. Then there are others that invest based on specific themes such as commodity-linked funds, gold-based funds, etc.

On the face of it, 2016 seems to have been a great year for international funds, with some of the gold and commodity-linked funds giving returns ranging from 50% to 70%, which has boosted the category average returns to 16%. However, without these funds, and taking into account only the equity-based funds, the average returns fall to below 10%. Another important point to note is that the same gold and commodity funds that saw spectacular returns in 2016, have given negative or low single digit returns in a three-year window.

Performance dissected…

Money went to US schemes in 2013 as performance of Indian markets was below par and the US markets were doing well. However, interest has dried up and investors now remain focused on Indian markets. US stock gauges such as the Dow Jones Industrial Average and S&P500 have gained about 12% in the two years to June 2016 compared to a drop of 16% for the MSCI emerging markets index and 9.55% for the Sensex. According to Morningstar data, Franklin India Feeder US Opportunities Fund, one of the largest such international fund schemes, has seen its assets under management fall to Rs.667.01 crore at the end of June 2016, down 15.5% from two years earlier. Other US-focused schemes such as ICICI Prudential US Bluechip Equity Fund, J.P. Morgan’s US Value Equity Offshore Fund and DSP BlackRock US Flexible Equity Fund have also seen a similar decline in assets managed over the last two years.

Funds that have focused on Europe have fared far worse as returns from these markets were flat in the two years to June 2016 or negative in some cases leading investors to pull out money. J.P. Morgan’s Europe Dynamic Equity Offshore Fund has lost 76.41% in assets under management in the two years to June 2016 while Invesco India Pan European Equity Fund and Franklin India Feeder European Growth Fund have lost 80.95% and 49.91%, according to Morningstar data.

Gold-related schemes have seen inflows reflecting the sharp rise in underlying commodity and gold mining stocks. DSP BlackRock World Gold Fund’s assets managed, for instance, have risen to Rs.357.64 crore at the end of June 2016, up 18.9% from two years ago, according to Morningstar data. Gold prices are up close to 28.1% since January 1, 2017, the best year-to-date performance in nearly three decades as investors sought safe haven assets amid global political and economic uncertainty and made bullion the year’s most preferred investment.

Re-look at returns

Global funds available in India have given mixed returns. In India, there are 33 global funds, which are commodity, country and region-specific. Over the last three years, these have given an average annual return of 11 per cent, with returns from individual funds varying from 0.5 per cent to 20 per cent. Out of 33 funds which are diversified or theme-based, ING Global Real Estate and Fidelity International Opportunities Fund have been top performers with over 17 per cent annual returns in the last three years. Both invest directly in shares of foreign countries. On the flip side, Birla Sun Life Global Precious Metals Fund has given a return of only 0.5 per cent.

The Bottomline

The need for diversification remains low but some global schemes have done well in the last couple of years. Investors need to warm up a little towards international markets schemes. Even fund houses need to provide more information to investors and promote the schemes well. That is missing at the moment. Some of the global schemes of Indian AMCs are not promoted well enough and independent financial advisors are largely focused on Indian markets. However, it is a good idea to hold dollar assets to the tune of 5-8% or even 10% of the total portfolio size.

Investors looking to diversify within equity can invest in international funds. Sometimes Indian equity investors also suffer from risks that may be country-specific such as the recent accusations of policy paralysis in the government. Global funds may mitigate these risks to an extent. While any kind of investment involves risk, including international mutual funds, investing in international funds presents unique risks including political, currency, regulatory and economic. The key is for the investors to do their homework, and understand where the investment’s exposure will be. Understanding any political risks can also be important before making any investment decision. To be vigilant, investors should set a target, monitor the allocation, and continually rebalance while keeping an eye on any developments within the portfolio. International mutual funds may not fit with a conservative person’s investment portfolio, but looking outside their domestic market may reward those investors seeking additional returns especially as global trade continues to expand and the world’s economies grow. Despite short-term volatility, historically, international equity markets have had favorable prospects for continued growth. International mutual funds can capitalize on that potential.