HSBC Brazil Fund doesn’t inspire much confidence

HSBC Brazil Fund doesn’t inspire much confidence

Investors who are interested in diversifying in foreign countries have an opportunity. HSBC Asset Management (India) Pvt. Ltd has launched a new fund offer (NFO) called HSBC Brazil Fund, a fund of funds (FoFs), that will invest in Brazil. FoFs invest in other funds and not directly in the market.

While the choice of country gives hope since just like India, Brazil’s economy is on growth path, the choice of fund doesn’t inspire confidence in view of its past performance.

Also See | Peer performance (Graphic)

Fund basics

The NFO will invest in HSBC Global Investments Funds (HGIF) Brazil Equity Fund. The NFO’s international portfolio will be jointly managed by Gaurav Mehrotra and Niren Parekh.

The equity exposure of the scheme could range around 95-100% and the debt part 0-5%. The debt investment will have to be made in the Indian market, according to the Securities and Exchange Board of India’s mandate.

Charges: The scheme’s expense ratio is 2.50% per annum. Of this, 1.65% will go into the FoF kitty, the balance 0.85% will be cornered by HGIF fund. Compare it with the expense ratio of HSBC Equity Fund Growth, which is 2.01%.

What’s good

Brazil is a growing economy. In 2010, the country’s gross domestic product, or GDP, grew 7.5%. Though the Indian economy grew at a faster pace of 8.6% in FY11, the Brazilian economy scores over India on another aspect.

Says Puneet Chadha, CEO, HSBC Global, “Brazil is fairly self-reliant for its energy requirements, whereas India depends on imports for the same which leads to exposure to commodity price changes." This at a time when crude prices are around $120 per barrel.

The other factor which goes in Brazil’s favour is its low estimated price-equity (P-E) multiple. Brazil’s estimated P-E for FY12 is close to 11 compared with India’s 15. The lower the P-E, the higher are the earning prospects.

What’s not

Choice of fund:HGIF fund has underperformed its benchmark, MSCI Brazil 10/40 Index, for the period since its inception in March 2006. Compared with the benchmark average return of 11.81% between March 2006 and February 2011, HGIF fund has given only 10.68% over the same period. However, in the last one year (ended February 2011), the fund has outperformed its benchmark; it gave 18.17% compared with the benchmark’s 12.42%.

Limited diversification scope: Numbers over the past 10 years suggest that both markets generally move in similar direction. Between January 2000 and December 2010, Nifty gave an average return of 20.68%, while Brazil’s Bovespa index gave 20.19% (data for Brazil given by Bonanza Portfolio Ltd). Also, the direction of the market, except in 2002, has been almost the same.

Bad precedent: Moreover, another FoF in the company’s stable, HSBC Emerging Markets Fund, which invests in emerging markets including Brazil has given negative return of 0.22% over the last three years. In the same time period, Nifty returned around 14%.

Mint Money take

Since Brazil’s growth prospects are similar to that of India, it makes little sense to look out and that too through the more expensive proposition of an FoF. Moreover, the basic aim of diversification through a foreign fund is not getting fulfilled here. The choice of fund doesn’t seem convincing and past examples are a deterrent. Also, there are domestic funds which are performing well.

Graphic by Paras Jain/Mint