FUND FLAVOUR - GLOBAL/INTERNATIONAL FUNDS

FUND FLAVOUR

Global/International Funds

Beyond borders - one world… one fund…

There was a time when global investment advisors were cajoling their clients to invest in emerging markets with a focus on India and China. Now it appears that Indians would be wise to look abroad. The average Indian equity diversified fund was down by nearly 51% in 2008, while the category of Indian mutual funds that invest overseas lost only 32% during this period. Currently, there are 16 open-ended funds that invest the bulk of their assets in foreign countries. These include infrastructure funds, commodity funds, funds that invest in gold mining stocks and the funds dedicated to emerging markets. These funds either take direct exposure to foreign equities or invest in foreign mutual funds. The total assets of these funds are Rs 3,076.71 crore (December 31, 2008). The best fund under this category is DSPBR World Gold Fund that invests in gold mining stocks by purchasing units of Merrill Lynch International Investment Funds - World Gold Fund. It shed nearly 18%. The worst fund, Principal Global Opportunities that invests in the Principal Emerging Market Fund, fell by 42%. Meanwhile, the fall in the equity diversified fund category was in the range of 31% to 81% in 2008. Even in equity diversified category there are 7 open-ended funds that have a leeway to invest in foreign markets which can go up to 35%. The average fall in these funds was 45% in 2008, below the average fall in the equity diversified category of 51%. The Indian market is amongst the worst hit as it has lost nearly 49% per cent in 2008 as against the 39% fall in the MSCI World Index over this period. But the 5-year annualised return of the MSCI World Index is way below at -3.93% as against the Sensex return of 9.96%.

Snail’s pace to rocket’s pace!

Indians wanting to globally diversify their portfolio have no dearth of options. From being permitted to invest $500 million in 1999, mutual funds can now go up to $7 billion. However, it is a completely different matter that fund houses have given a cold shoulder to their enhanced foreign investment limit. Even the first Indian fund with a mandate to invest abroad — Principal Global Opportunities — was launched in March 2004, a good five years after Indian funds were permitted to invest abroad. There were no takers for overseas investing even when the rupee was appreciating. So, it is a relief to see a change in the attitude of asset management companies. As of now, the total overseas investment of funds is around Rs 5,000 crore. And investors who have invested in such funds are certainly not complaining since it is this very overseas exposure that has softened the equity blow. The funds investing a bulk of their assets globally (over 65 per cent) fell much less than their peers who invest only locally.

On the Indian investor’s menu!

With the four-year bull-run in domestic stocks faltering, Indian fund houses are stepping up efforts to woo investors to ‘global’ funds — schemes that invest in stocks or other assets outside India. As many as 13 fund houses now feature global products in their menu. While the global funds launched earlier had focused on foreign stocks, usually from the high-growth emerging markets in Asia, the recent ones promise entry into new asset classes not readily available to Indian investors — precious metals and gold mining companies, natural resources, commodities and global real estate.

What do these global funds offer that domestic funds don’t? Global equity funds such as the Templeton India Equity Income Fund or the Fidelity International Opportunities tap their global research teams to buy stocks from new sectors or themes that are not well represented in the Indian listed space. Retail, consumer electronics and natural resources are key sectors in which these funds shopped overseas for global flavour.

Fund houses such as Kotak Mutual have used the ‘feeder’ fund route to allow Indian investors to access a recognised global manager. Investments into Kotak’s Global Emerging Markets Fund ‘feed’ into the T.Rowe Price Global Emerging Markets Fund, which has managed a 32 per cent return over a 10-year period.

Feeder funds have also been used to tap into new asset classes such as gold or property overseas. DSP ML now offers two global funds that invest in foreign funds managed by BlackRock, a market leader in natural resources with a $42- billion portfolio. ING Global Real Estate Fund, also a feeder fund, features investments in REITs and property developers in the US, Australia, Hong Kong and Japan. Real estate carries volatility half that of equity, while returns (from real estate) are three times that of bonds.

In recent times there has been a growing trend among mutual funds to launch funds that invest in the sponsor's mutual fund abroad. Currently there are two such funds that invest in mutual funds abroad, DWS Global Thematic Offshore Fund and HSBC Emerging Markets.

Can Robeco looks at water funds, renewable and alternate energy funds etc.

Insulation in times of desolation!

Only 35 out of 280-odd equity funds managed to outperform their benchmark indices. The only bright spot, solely by virtue of lower losses, have been those funds investing in overseas economies (international/offshore funds), which have fallen by 8-18%. Of the small number of funds that beat the benchmarks handsomely, a majority are those that also invest abroad. Though some international funds lost investors’ money, they lost a lot less than domestically-focused funds. This demonstrates the value of true diversification in bad times.

International or global funds, a relatively new offering for Indian investors, have acquitted themselves well in the year or more since they were flagged off. As a class, these funds have contained their NAV losses better than their domestic diversified peers over the last year, as an analysis of 21 international funds shows. But before rushing to conclusions on their superiority, it must be noted that only a select set of international funds outperformed domestic funds, which fell by over 50 per cent. And only 65 per cent of these international funds have a track record of over a year. Among the various types of international funds, gold funds truly glittered, especially over the last six months, riding on soaring prices and a re-rating of gold mining stocks. Funds focused on emerging markets were the worst hit, followed by those that invest globally across geographies. Commodity funds, most of which have only a three-month record, recorded middle-of-the-line returns, while the lone real-estate fund is on the back foot, suffering the highest fall in the last year. Each category of international funds is driven by a different dynamic. But one critical factor that aided all of them was the substantial depreciation of the rupee against the dollar the past year. A 25 per cent depreciation of the rupee against the dollar meant that most funds owe 10-15 percentage points of their returns to this phenomenon. International funds usually convert their overseas holdings at the closing rupee conversion rate of the day for the purpose of calculating their NAVs.

International investments overhyped?

The case for investing abroad appears to be somewhat stronger today than it was in the past. The basic reason that has always been offered is obviously diversification. This most basic idea in investing is that different types of investments may not lose or gain at different times. Therefore, it makes sense to put money in investments that are mutually dissimilar. However, a close look at the actual performance of stocks around the world indicates that the advantages offered by such diversification may not be as strong as they are supposed to be. Moreover, the argument may be getting weaker just as it is being accepted by more investors. As things have turned out, this diversification may prove to be illusory. While the market commentators' daily recitation of the 'global cues' becomes tedious after a while, the broad direction of the domestic market is interlinked to the world's stock markets. From a global perspective, investors in one emerging market-India-investing in other emerging markets like China or Latin America does not sound like a great idea. Out of the 21 global funds on which data was available, according to Value Research, more than 90 per cent have fared worse than the average equity diversified scheme.

India’s mutual fund managers, after waging a losing battle throughout 2008, are hoping they can recoup some losses in 2009. Given the turmoil in Indian stock markets since January 2008, many global funds have fared better than local equity funds this year. But this is not long enough to establish if returns are sustainable. Overseas investing is about diversifying risk and not always about enhancing your opportunity or returns.