Go West! Diversify your portfolio
In a bleak market scenario, a fund delivering a 1-year return above 20% is unimaginable, though not impossible. In fact, there are funds that have managed to leap over that bar. If you look at the category international funds available to the Indian investor, you would find quite a few that actually have 1-year positive returns at a time when most local equity funds are struggling.
Though the decline in the value of the rupee does contribute to the numbers, there is certainly more to it. If that were the sole reason of the impressive performance, then all funds in this category would have overwhelmed. Instead, the international funds category is a mixed bag of performances with the mining, gold and commodity funds languishing in negative territory.
We look at a few funds that have done well and offer a unique proposition to help an Indian investor diversify.
The US beckons
Even if you don’t read the news but glance at the headlines, you would realise that no matter how bad things are in Europe, chances are they could get worse. On the other hand, the US economy should not be written off. While one can cynically refer to investing in US stocks as being “the best house on a bad block”, it is more than just a choice between the devil and the deep blue sea.
A lot of the negatives are already priced into the US stock market, some stocks are available at great bargains, cash-rich companies are poised to grow and a significant number of companies are posting profits selling into the global market. The US equity market currently trades at PE ratios of 12.8X, 11.4X and 10.2X based on 2012, 2013 and 2014 estimated earnings, suggesting hefty upside based on our fair value estimate of 15X for the US stock market.
Here are 2 funds that hit the market this year and are positioned to capitalise on this, though their investment mandates and method of stock selection differ.
ICICI Prudential US Bluechip Equity invests in stocks listed on the NYSE and NASDAQ. Do note, this is not a feeder fund and the final stock selection will be done by the Indian fund manager. The fund house has entered into a partnership with Morningstar Equity Research Services. The latter will identify stocks on the basis of a strategy called Wide Moat. Companies that receive a Wide Moat rating have strong competitive advantages in terms of intangible assets, cost advantages and have the potential to generate better returns on new capital employed.
FT India Feeder Franklin US Opportunity is a feeder fund that invests predominantly in the units of Franklin U. S. Opportunities Fund. The latter invests in US-listed stocks and is benchmarked against the Russell 3000 Growth Index.
Diversify across assets
ING Global Real Estate Retail has a unique diversification on two levels. Since it invests in real estate properties and projects across the globe, not only is the diversification in terms of asset class but also in varied geographies, across around 10 countries. This immense diversification presents more potential for alpha generation. So if you want to invest in property in Sao Paulo or Moscow or London, try this route. Over the past 3 calendar years, this fund has generated positive returns and its 1-year return is 23% as on June 28, 2012.
Capitalize on a unique theme
DWS Global Agribusiness Offshore Fund is a fund-of-fund (FoF) whose underlying fund is DWS Invest Global Agribusiness. This fund invests in a wide range of agribusinesses - the entire food chain and in almost every business allied to agriculture. The investment universe comprises of companies that provide farming inputs (seeds, fertilizers, equipment, machinery), plantation companies, companies in water management, companies that provide credit to agriculture and even those that handle the output (storage, trucking, marketing, distribution). Further downstream, even supermarkets, food manufacturing companies and restaurant chains are considered. This diverse theme with as many as 33 sub-sectors offers a fantastic opportunity for Indians to invest across the globe in businesses that have a paucity of investment opportunities in this country.
The falling currency is your friend
Besides the regular risks of investing, there is always the foreign currency risk that goes with international funds. Right now, it is working in favor of India where the sharp erosion in the value of the rupee against the dollar has resulted in increased net asset values (NAVs). In fact, the value of the dollar has increased by more than 18% over the past 10 years and more than 23% during the past year.
Having said that, one should not let this be the prime criteria when selecting such funds. Opt for them because you genuinely believe in diversification across the globe and themes. It has been 8 years since Indians have been allowed to invest in stocks abroad. With the amount of options now available and the returns being generated, the idea of diversifying across asset classes across borders may finally catch up.
Click here to know Why Diversify?
Know more: Another reason why you should invest in mutual funds: Diversify in a cost-efficient way