When your fund manager invests abroad, it’s not just his stock-picking skills that are called for, understanding foreign markets as well as correctly predicting currency movements is also key. That’s also called the fund manager risk. An exchange-traded fund (ETF) route is one that avoids the fund manager risk. Benchmark Asset Management Co. Pvt. Ltd—India’s only fund house that specializes in ETFs—has launched an ETF that will invest in the Hong Kong equity market. Called Hang Seng BeES (HBS), it aims to passively track the movement of the Hang Seng index by investing its entire corpus in the index. Should you invest in this fund?
Graphic: Yogesh Kumar / Mint
HBS works like any other ETF. It appoints officials in the Indian stock market who are willing to buy shares that are part of the Hang Seng index, a basket of 42 companies. In exchange, the fund house will release units of HBS which can then be bought and sold on the market.
…that flies abroad
Unlike existing ETFs that invest in Indian equities, HBS will invest in Hong Kong. The fund’s fortunes will, therefore, be very closely linked to those of Hong Kong’s Hang Seng index. India is not new to foreign funds (mutual fund schemes investing in global markets). All of them are actively managed, though. They either buy and sell securities directly from foreign markets or solicit your money through a feeder fund that fund houses launch in India and then invests your money in the parent company’s schemes that are domiciled abroad.
These parent funds would then buy and sell scrips as per the fund manager’s discretion. HBS is the first passively managed foreign fund. “We plan to launch more such country- or region-specific ETFs that invest abroad”, says Sanjiv Shah, executive director, Benchmark Asset Management Co.
India and China are largely perceived to be two of the fastest growing economies by many global investors. China’s increasing spending on infrastructure and construction areas has made it one of the world’s fastest growing economies. China’s foreign exchange reserves stand at $2.4 trillion. China’s Shanghai index returned 80% returns in 2009, outperforming most other economies across the world. The Hang Seng index—that constitutes 37.97% that are H-Share companies (those that are incorporated in mainland China and listed in Hong Kong) and 16.32% of Red Chips companies (those that are incorporated outside mainland China but earn significant revenue from mainland China)—returned 52.02%.
There are three other Indian funds that already invest in Chinese markets, albeit in different ways. Fortis China-India Fund invests directly in Chinese equities, but only to the extent of 35% of its total corpus (the rest is invested in Indian markets), Mirae Asset China Advantage Fund and JPMorgan JF Greater China Equity Offshore Fund invest their own corpuses in their respective international funds which invest in the Chinese equity market, including Hong Kong, and are managed by their parent fund houses. However, all these funds are actively managed and carry fund manager risk.
…and what doesn’t
If China has been one of the world’s fastest growing economies, India isn’t far behind. In the past five years, Nifty has been one of the best performing indices globally. It returned around 24% against 10% by the Hang Seng index in the past five years, though the latter did well in the falling markets of 2008.
Despite high growth in the past year, a section of India’s fund managers still feel there is enough merit in remaining local. “India offers better investment opportunities and its fundamentals are still one of the best from a long-term perspective,” says Sunil Singhania, equity fund manger, Reliance Capital Asset Management Ltd. Not all agree though. “Meaningless diversification doesn’t make sense. However, if you select your geography well, investing abroad makes sense”, says Sanjay Sinha, chief executive officer, L&T Finance Asset Management Co. Ltd.
Fund managers, however, feel China can be quite a volatile market to invest in. That HBS is an ETF and avoids fund manager risk may be of some relief here.
Ultimately, it pays to invest in markets that have a low correlation with the Indian market. We checked the correlation between Hang Seng index and Nifty in the past three years. Measured on a scale of zero to 1 with 1 being a perfect correlation (both move by the same margin in either direction), Hang Seng’s correlation to Nifty stands at 0.623, according to Bloomberg. The higher the correlation between the two indices, the lesser the merit for diversification.
The Hong Kong stock market closes at 4.30pm Hong Kong time or 2pm India time. If you buy HBS after 2pm, the difference between the bid/ask spread could be higher because though you can buy and sell HBS units in India, the Hong Kong market would have closed; the market participant would therefore charge a small premium to compensate for the risk.
“This could be a problem in the near term, but we feel over time it would get ironed out,” says Shah. Since it’s an international fund, HBS’ expense ratio will be 1% against, say, 0.50% of Nifty BeES— Benchmark Asset Management’s India-centric ETF that tracks the Nifty index.
Should you invest?
Avoid HBS if you haven’t yet invested fully in Indian markets. There are enough diversified and thematic funds across the market spectrum which offer you a good chance to make money including passively managed funds. Go for HBS only if you are prepared to take on the risk of this highly volatile market.
Ashwin Ramarathinam and Saurabh Kumar contributed to this story.