AMFI Registered Mutual Fund Distributor | SEBI registered Investment Adviser
FSM LOGO

                    


titl_l_gif
Research
title_r_gif
Share | Email Print more
PineBridge India-US Equity Fund: Opportunity To Access An Economy Too Big To Ignore
November 29, 2013

iFAST Research's Take on the NFO -PineBridge India-US Equity Fund.


Author : iFAST Research



 Motilal Oswal MOSt Focused 25 Fund

There is a saying, “When the US sneezes, India catches a cold”. This is substantiated by the very fact that any event in America, right from non-farm payrolls to the FOMC meeting has a significant bearing on the direction of our markets. Stock market analysts and experts in India do not underplay the importance of statements released from the Oval Office or the Federal Reserve Bank. It is viewed in the same light as any statement released from our very own North Block or Mint Street. This obsession with the US has not spared even the mutual fund industry as can be seen from the fact that since the beginning of 2012, four fund houses have launched funds which let investors take an exposure into the US markets. A recent entrant into this category is PineBridge Investments, the erstwhile AIG Mutual Fund, which has launched their NFO,that is open until December 13,2013. This fund will take an exposure into the US markets which according to them is an economy “too big to ignore”. This is an open-ended fund of funds which will invest into PineBridge US Large Cap Research Enhanced Fund and has been in existence since August 25, 2005.

We at iFAST Research desk have always been suggesting that our investors take an exposure into global funds depending on their risk appetite. This is also the reason why we have designed 2 global portfolios (moderately aggressive (global) and aggressive (global)) in addition to our 5 domestic portfolios, which have been made available to our investors. In our global portfolios, our exposure into our recommended global funds is as high as 30%. As we have always been saying, global funds should be viewed not only from the diversification point of view but also as a tool to eliminate the concentration risk that will result if all eggs are put in one basket.

This article will mainly focus on 3 aspects: View on the US economy from our Global Research Desk, a brief update on the investment strategies that will be followed in the PineBridge India-US Equity Fund and our take on the fund.

Why we like the us economy?

A slower-than-expected economic recovery, but things are improving

The US economy has come a long way from the doldrums of 2008-2009, where the economy entered a prolonged recession following the downturn in the housing market. While the economic recovery was fairly tepid in the context of the sharp prior decline in economic output over the course of the recession; this was a function of modest corporate investment and a relatively slow pick-up in consumer spending as political concerns plagued consumer and business sentiment – the debt ceiling debacle of 2011 is a case in point. Issues like the partial Federal government shut-down and “fiscal cliff” have also weighed (in various magnitudes) on overall growth. Coupled with a recession in the Eurozone, the global economic landscape has generally not been a positive one for US businesses and consumers alike over the past few years, while government spending has also been suppressed by fiscal concerns.

Today, it appears that the US economy is on a more positive growth trajectory, with aggregate jobs growth recently rising to some of the highest levels in the current economic expansion (even considering the weak government-sector hiring) as well as a more normalized housing market (housing starts have risen considerably from their recessionary-lows) which has contributed positively to both gross private domestic investment, as well as had positive knock-on effects on consumer spending (home improvement, durable goods etc.). With the recovery in home and stock prices, US household net worth has also risen in tandem to all-time highs, which should provide a strong tailwind for consumer spending in the quarters ahead. Critically, the forward-looking manufacturing sector remains a bright spot, with PMIs continuing to demonstrate growth in the sector – the on-going strength in this capital and labour intensive segment should have positive spill-over effects on other sectors of the broader economy.

  Positive long-term drivers

“Shale Gas Revolution” has brought an important competitive advantage to US manufacturers – the availability of cheaper energy (natural gas). With the IEA’s latest forecasts suggesting that the US may become energy self-sufficient by the 2020s (or even a net exporter by 2030); US firms should have a new competitive advantage vis-à-vis their international peers via their unparalleled access to cheaper energy. A combination of new investment in the field of shale gas alongside the rising competitiveness of US manufacturing (which has led to “on shoring” activity) should provide new long-term drivers for the US economy.

High quality global companies, but valuations have normalized

US equities encompass some of the leading companies in various fields; examples include Apple, Microsoft and Google within the technology space, while US-based energy companies like Exxon Mobil and Chevron are amongst the largest in the world. US companies also possess strong branding power; 18 of the top 28 global brands of 2013 (based on Millward Brown Optimor’s annual “BrandZ” study) were held by US companies, while the top 9 spots were all US brands.

Valuations

As of 22 November 2013, the US market trades at an estimated PE ratios of 16.3X, 14.8X and 13.4X based on estimated 2013, 2014 and 2015 earnings respectively. While we expect macroeconomic conditions to improve going forward, the market’s strong gains this year have driven up valuations, which have correspondingly lowered our forecasted returns for US equities. We think that the market is poised to deliver a more normalized return commensurate with the pace of earnings growth (which is likely to be driven by revenue growth going forward, rather than a further expansion of profit margins), and maintain a 3.0 star “attractive” rating on the market.

Salient Features of PineBridge India-US Equity Fund

The Offer Document states that the investment objective of the underlying fund (PineBridge US Large Cap Research Enhanced Fund) is to attain long term growth of capital by means of a diversified portfolio through investment in equity and equity‐related securities of companies, at least 90% of which have assets, products or operations based in the United States or are included in the Russell 1000 Index. Up to 10% of the value of the fund may be invested in other companies which have a US Stock Exchange listing. The fund will use a combination of qualitative (Subjective Analyst Observations) and quantitative factors which will rely on PineBridge’s Investments Global Equity Process to categorize stocks into appropriate growth categories. Here what they are referring to is that they do not segregate companies on the basis of sectors but use lifecycle contextuals to do the same. Hence, the companies in this portfolio will be ranked under four categories that is Exceptional Growth, High Stable Growth, High Cyclical Growth and Mature companies. The last segment is again divided into 3 components i.e. Mature Turnaround, Mature Cyclical and Mature Defensive. Once the categorization is done, the stocks are ranked using a quantitative algorithm, which is based on fundamental factors. Finally, the portfolio selection is then run though a Portfolio Optimizer which will favour stocks which are ranked highly in the investment manager’s growth categorization process and then create the portfolio in such a manner that the tracking error is very similar to Standard & Poor’s 500 Index. In short this is a sector /style agnostic fund which tries to outperform the benchmark index (Standard & Poor’s 500 Total Net Return Index).

Why we like PineBridge India-US Equity Fund?

We at iFAST Research desk believe that the main feature that stands out in the case of this fund is the life cycle categorization which is not something that any of the funds in India currently adhere to. The fund’s mandate of following a strategy which will provide the best of both worlds (active and passive investment styles) to outperform the benchmark index, has been favoring the fund during our period of analysis (October 31, 2008 to October 31 2013).We are of the view that a mix of active and passive strategies could lower tracking errors and control risk. We would recommend our moderately aggressive and aggressive investors to take a 5% to 10% exposure into this fund on the basis of our positive outlook on the US economy along with the future potential that we see in this fund which will be a value add to the existing portfolio. However, a word of caution to our investors is that there has been a lot of hype around international funds in the last few months, due to fluctuations in currency and we recommend our investors not to go by the superlative performance delivered by these funds during this time period. Investors need to remember that currency fluctuations can also play havoc on a global portfolio. Hence the biggest factor to consider when entering a global fund should be the macro factors of the economy that the fund is investing into, along with the strategies that the fund will follow which should help investors in the long term.

Details of Pinebridge india-us equity fund

Nature of Fund

Open ended fund of funds, Equity : Global

NFO Opens on

29-Nov-13

NFO Closes on

13-Dec-13

Minimum Investment Amt

INR  5,000

Benchmark

Standard & Poor’s  500 Total Net Return Index in USD (benchmark of underlying Scheme) converted to INR using RBI reference rate

Fund Manager

Vikrant Mehta

Entry Load

NIL

Exit Load 1% of the Applicable NAV if redeemed within 1 Year from the date of allotment.

 

To invest into this fund, click here


Disclaimer: iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's scheme information document including statement of additional information. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer on the website.Please read our disclaimer in the website. Risk Factors: Mutual funds, like securities investments, are subject to market risks and there is no guarantee against loss in the Scheme or that the Scheme’s objectives will be achieved. As with any investment in securities, the NAV of the Units issued under the Scheme can go up or down depending on various factors and forces affecting capital markets. Past performance of the Sponsor/the AMC/the Mutual Fund does not indicate the future performance of the Scheme. The name of the Scheme does not in any manner indicate the quality of the Scheme, its future prospects or returns. Please read the Statement of Additional Information and Scheme Information Document carefully before investing.



Comments (0) | Comment on this Article
 (Click on Comments/Comment on this Article to show or hide comments/post a comment)
USEFUL LINKS
Recommended Funds
Recommended Portfolios
Chart Centre
Risk Profiler