ATM :: Why you should invest in global funds


K. VENKATASUBRAMANIAN| Business Line|

ATM

Global markets are cheaper and a falling rupee can add to your returns.

Will the rupee ever recover? That is the question on everyone’s mind, with India now running a record trade deficit. A weak rupee can have many adverse consequences for you, as a consumer, employee and tourist abroad. But can you make money from it? You can, if you own international funds, or funds that invest in foreign equity and overseas mutual funds.

Some of these funds have had a good run over the past 12-18 months. And the performance didn’t just come from the rupee’s weakness.

The rupee depreciated by about 5 per cent in the last one year, but the top ten international funds have delivered returns of 12 to 31 per cent in the last one year. Domestic equity funds, in contrast, managed an average 3 per cent returns.

Of course, there were underperformers among international funds. But the right choice of two or three global funds would have perked up your overall portfolio returns.

So what must you look for while parking money in international funds?

First, a recap of their recent performance. The global funds now available to Indian investors fall into several categories — those that invest in emerging markets, global indices, commodities, real estate and hard assets.

WINNING THEMES

An analysis of their returns over the last one and three years shows that two themes worked well.

One, funds which invest in Asia. In the last three years and especially over the past one year, many funds which invest in Asian markets — China, Singapore, Indonesia, Taiwan and South Korea — have done extremely well, delivering 15-22 per cent. These markets offer attractive avenues for investment in sectors such as semiconductors, energy, utilities, mining and telecommunication services. Some markets such as Mexico and Argentina too have rallied quite well, though Brazil continues to be a laggard in the Latin American market.

In this category, funds such as Templeton India Equity Income, JP Morgan JF Greater China Equity Offshore, JP Morgan JF ASEAN Equity Offshore and Kotak Global Emerging Market delivered a 12-29 per cent return over the past one year.

Funds which invest in developed markets, on the other hand, saw very few outperformers. But Birla Sun Life International Equity – Plan A has been a consistent performer in this category as it invests in the US, Germany and a few other European countries, making it a well diversified basket. Markets in these countries are trading at multi-year highs.

The second winning theme was real estate, but only one fund capitalised on this. ING Global Real Estate has delivered exceptional returns of 15.3 per cent over the past three years and 21 per cent in the last one year. The scheme invests in stocks and REITs from across the world.

LOSING THEMES

While international funds playing on Asia did well, those betting on commodities and natural resource-reliant countries fared poorly.

The weak global economic outlook led to a very sedate performance from a range of commodities in the past year. Coffee and sugar prices, for instance, have fallen substantially on higher trade surpluses.

With key consuming nations such as Europe seeing poor demand, crude oil and base metal prices too have been flat. Funds which bet on commodities and agricultural products or specific countries expecting them to benefit from a rally have seen erosion in NAVs. Mirae Asset Global Commodity Stock, ING Global Commodities, Birla Sun Life – CEF – Agri Plan, have all delivered poor returns for this reason with declines of 4-5 per cent in the last one year.

In a surprising twist, funds that bet on gold mining stocks have proved laggards too. Gold prices have fallen, with its safe haven allure fading with rebounding equity markets. On top of this, stocks of gold mining companies have trailed the yellow metal. Companies such as Newcrest, Goldcorp and Kinross have witnessed around 30 per cent fall in their stock prices in one year.

This has decimated NAVs of DSPBR World Gold Fund and PineBridge World Gold Fund, which invest in this space, with a 18-19 per cent erosion in their NAVs. Among funds riding on such themes, L&T Global Real Assets (earlier Fidelity Global Real Assets) has been a consistent performer. It has delivered over 12 per cent annually over the past three years, outperforming both domestic funds and most international schemes.

WEIGHING RISK-RETURN

Given this mixed performance, should you invest in global funds? There are many positives to it.

First, you diversify risks by investing across markets. The international basket is much wider than the domestic.

Second, global markets are cheaper. For instance, the DJIA, S&P 500, FTSE and CAC trade at 13-14 times historic earnings (Bloomberg), while domestic benchmarks are at around 16 times.

Two, despite the rally in the developed markets, the valuation multiples are also at par or lower than their historic averages. Third, the icing on the cake — gain from a falling rupee.

Do, however, take the following points into account before the plunge.

One, international funds are treated as debt funds and taxed accordingly. Two, while global funds may appear good for diversification, Indian markets are likely to offer better returns over the long term. Hence they must form only 5-10 per cent of your portfolio.

Three, avoid high-risk commodity or theme-based funds; they require timing.

Finally, based on long-term track record and mandate, you can invest in any two of the following: Templeton India Equity Income, Birla Sun Life International Equity, L&T Global Real Assets and Kotak Global Emerging Market. Two other funds, which have done well over the past couple of years JP Morgan JF Greater China Equity Offshore, JP Morgan JF ASEAN Equity Offshore, can be monitored closely for investments later.

Source : http://goo.gl/Rb4dD

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