Going global

Going global

In July and August, India’s stocks trembled and followed the movement of stock markets in other countries for the fourth time. During August, Indian stocks fell by 6.11%, but the investors in countries such as Malaysia and Thailand lost as much as 9%. In countries such as Turkey and Columbia, they lost as much as 12%. So, overall, Indian investors were better off than those in 14 other countries.

Does it then make sense for Indians to own stocks of a Korean semiconductor company or a gold mining company in Australia, for instance, in their portfolio? Mutual fund managers are going out on a limb to convince investors that this is the best time to own stocks in other countries for the sake of diversification. Eight international funds have been launched over the past two months, taking the total number of such funds to 12.

Three more global funds from HDFC Asset Management Co. Ltd, Fidelity Fund Management Pvt. Ltd and Standard Chartered Asset Management Company Pvt. Ltd are awaiting the approval of the Securities and Exchange Board of India (Sebi).

“Indian stock markets are no longer delivering top returns as compared with the other emerging markets," says Nikhil Johari, managing director, ABN Amro Asset Management (India) Ltd, which has launched a China-India Fund. “In recent times, because of US subprime issues, all the markets have fallen. But the performance of Indian and Chinese stocks, over the long run, is quite divergent. So, there is a case for Indian investors to look beyond India."

You can spot some interesting trends by studying the patterns of 12 emerging markets over a 10-year period. There is no stock market that can be singled out as the top gainer for all the years.

This indicates that it is prudent to diversify in the long run. For instance, in the technology-led bull run of 1999, Indian investors earned 67% return on the S&P CNX Nifty Index, which comprises 50 blue-chip companies, but investors in Brazil and South Korea created maximum wealth as their key indices gained by 151% and 82%.

In 2000, when tech stocks were hammered and there was a market meltdown, 10 of the 12 emerging markets suffered losses. Investors in Venezuela were the only ones to make money, as their stock market was up by 26%. Even in the past few years, when Indian stocks have performed exceedingly well, other emerging markets have posted superior returns.

It is for this reason that the mutual funds are trying to create opportunities of gaining exposure in the other stock markets, which may offer better returns in the long haul.

The good news for investors is that the amount invested in such international funds will not be treated under Reserve Bank of India’s $100,000 (Rs40.7 lakh) outward remittance scheme. The RBI’s scheme allows each individual to buy assets such as stocks, funds and real estate abroad each financial year.

So, by making investments in rupees only, investors can use the international funds to diversify their stock portfolio and RBI’s remittance scheme can be availed of to acquire other assets abroad. Indian investors got the first opportunity to invest abroad in 1999 when mutual funds were allowed to invest in American Depositary Receipt (ADR) or a Global Depositary Receipt (GDR) of Indian companies only.

Gradually, the doors opened for investment in bonds and fixed-income products of other countries. A mutual fund company could only invest 10% of its assets with an upper limit of $50 million.

In 2003, funds were allowed to launch schemes that could invest in foreign companies, which held at least 10% in any Indian company.

Each mutual fund could invest up to 10% of its total assets, with a limit of $50 million.

Mumbai-based Principal Pnb Asset Management Company Pvt. Ltd was the first fund house to launch a Principal Global Opportunities Fund that could invest in stocks of other emerging markets.

Because of the limitation on the investment universe and the strong returns posted by Indian stocks, the fund didn’t take off.

Also, the Indian rupee gained strength against the US dollar. So, the dollar investments brought back into India, on conversion into rupee, would have fetched lower returns for investors.

Therefore, neither the direct investing nor the fund route took off in a big way. In 2006, mutual funds got more freedom to invest abroad. The industry limit was raised from $1 billion to $2 billion and then to $3 billion in January and, again to $4 billion in May.

While each mutual fund can invest up to 10% of its assets as on 31 March, the cap was increased from $50 million to $100 million in 2006, to $150 million in January and to $200 million in May.

The caveat of investing only in those foreign firms which have 10% stake in Indian companies was removed.

The funds can also invest in overseas exchange-traded funds. So, with regulations becoming more flexible now, mutual fund companies have started launching an array of international funds.

Now, most of the international funds are taking exposure only in the stocks of emerging markets.

DSP ML World Gold Fund and Sundaram BNP Paribas Global Advantage Fund are the only two which allow exposure to other assets such as gold and real estate.

So, with the Sundaram BNP Paribas Global Advantage Fund, one can invest in stocks of emerging markets, real estate funds and commodity funds. The fund plans to allocate 38% of assets to emerging markets in Asia, 15% into emerging markets of Europe and 17% into Latin America.

The balance 30% will be allocated to real estate and commodities, for which the fund will take exposure through the real estate investment trusts and commodity exchange-traded funds.

Riding on the good performance of its infrastructure fund, Tata Asset Management has stretched into global markets as well. Tata Indo Global Infrastructure Fund, its new fund, will invest 30-35% of its assets in foreign infrastructure companies through an exchange-traded fund of Invesco Plc., a UK-based asset management firm.

There is one set of funds that will invest directly in listed stocks of other countries. The Indian fund manager will manage the portfolio of international stocks, but the fund may take advice from the international fund managers.

Another set of funds, instead of directly investing in stocks abroad, will put money in other global funds, which may be investing in stocks across various countries. Deutsche Asset Management (Asia) Ltd’s DWS Global Thematic Offshore Fund will invest in DWS Strategic Global Themes Fund. Similarly, DSP Merrill Lynch World Gold Fund will invest in Merrill Lynch World Gold Fund.

Such funds are known as the fund of funds (FoF). As the fund managers are sitting in India, they aren’t involved in stock picking or active fund management—the expenses charged to investors can be as low as 0.75%.

But not all the global funds launched until now will fully invest the money abroad. Some of them take only 25-35% exposure in the stocks of other countries, either directly or through another global fund, investing the rest in domestic stocks.

Such an allocation is maintained to make these funds tax-friendly—because if any fund invests at least 65% of its assets in Indian-listed stocks, it becomes eligible for exemption from capital gains tax and dividend distribution tax.

ICICI Prudential Asset Management Co. Ltd’s Indo-Asia Equity Fund will invest up to 35% in the Prudential Corp.’s Asian Equity Fund.

Similarly, ABN Amro’s China-India Fund will invest directly in Chinese stocks, but up to 35% only. These funds could be as expensive as any other equity fund. Financial planners and advisors recommend these funds for investors who have had an exposure to Indian stocks earlier.

Nipun Mehta, director and chief executive officer, Unitis Tower Wealth Advisors, a Mumbai-based advisory firm, says the international funds with 35% overseas exposure are right for those who want to increase their portfolio of Indian stocks. This combination meets the twin goals of diversification in India and other countries.

Investors, who first want to get a sense of how international investing works, can try by first investing in these funds, rather than taking on a full exposure. Around 5-10% of his clients have started investing in these funds, Mehta adds.

But Gaurav Mashruwala, a Mumbai-based financial planner, recommends full-fledged international funds to his investors, who are already invested in Indian stocks, because it offers meaningful diversification. Mashruwala has recommended a systematic investment option (SIP) in DSP ML World Gold Fund to his clients, who are not disciplined enough to regularly buy the units of the gold exchange traded funds. Gold Exchange Traded Funds (ETFs) can be bought from a stockbroker because these funds are traded on the exchange.

But there are many other planners who are adopting a cautious approach as of now. Sapna Narang, managing partner at Capital League Wealth Management, a New Delhi-based firm, isn’t recommending these funds in a big way.

“It’s prudent to wait and see what other mutual funds are likely to offer as the international opportunities are huge," she says. She advises investors to be cautious while reading the brochures of the new funds. International funds, which invest in other global funds, may show returns for a particular category of investors in such funds, but the same may not be applicable to Indian investors.

Thus, FoFs may be cheap in terms of expenses, but their performance will be dependent solely on the performance of the global fund they invest in. For instance, DWS Global Thematic Offshore Fund, where Deustche Asset Management will be putting money, has underperformed in the Indian markets in five out of 10 years since 1998. In this calendar year, until 30 June, the fund outperformed the Indian stock market by two percentage points.

The asset management company’s track record in managing local equity funds is also a crucial factor which planners take in to consideration when they recommend international funds to their clients.

How they stack up

Principal Global Opportunities Fund and Templeton India Equity Income Fund are the only funds with the longest track record. Both have different investing styles as the Principal’s fund invests in PGIF Emerging Markets Equity Fund and the Templeton’s fund invests in stocks with high dividend yields.

However, if the returns of both funds are compared, it appears that a partial exposure to international stocks has given superior performance.

Templeton India Equity Income Fund has exposure to companies in Taiwan, Korea, Mexico and Russia. PGIF Emerging Markets Equity Fund has top holdings in Mexico, Brazil and Russia.

Over the last one year, the Templeton fund has posted a return of 41% against Principal Global Opportunities’ 28%.

During the recent volatility in the stock markets, Fidelity Fund Management’s International Opportunities Fund, launched in April, has been the better performer. During the one month ended 31 August, the fund was down by 1.70%, Templeton’s fund was down 2.41% and Principal lost 3.10%. Fidelity’s International Opportunities Fund hasn’t disclosed its portfolio yet.

Calculated risk?

The exposure to the international markets brings along its own set of risks, which the asset management companies may try to downplay in their sales pitch. Overseas investments are exposed to currency risk, especially if the currency of the country where the investment is made depreciates in value against the rupee.

So, the actual returns earned in rupee terms may be less than the gain in the stocks of that country. Asset management companies plan to minimize the currency risk by using hedging techniques.

If investors were to invest in overseas stocks on their own, managing the currency risk by hedging wouldn’t be a possibility. Therefore, funds are in a better position to take care of that risk. In addition, there could be risks related to the specific country, such as a political crisis and changes in economic policies that could be beyond the control of the fund manager.

Mobis Philipose contributed to this story.

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