Recently, there has been a lot of debate over global funds and its allocation into an investor’s portfolio. This category of funds became a topic of discussion especially after the Finance Minister changed the rules of debt funds taxation in the Budget which he presented on July 10, 2014. As global funds are subject to debt taxation, the question that arose in most of the investors’ minds was “Is it worthwhile investing into Global Funds if we have an investment horizon of less than 3 years?” Firstly, let us make our stand on the topic very clear through this note.
We have always recommended global funds to our Moderately Aggressive and Aggressive investors with a time horizon of 5 years. This is because global funds, as per their mandate, invest either into the stocks/bonds of different countries, commodities and even currencies. Hence, investors need to be patient with these investments and should not take an exposure into this category, if their holding period is less than 3 years.
A year back, global funds were a big hit among the investor community on account of the fabulous returns delivered by these funds. This superlative performance could be attributed to the volatility in currency. While investors were still trying to figure out which global funds to invest in, the currency stabilized and the fund’s performance started to move in the southward direction. What the investors forgot here is that the performance of global funds is not only dependent on currency fluctuations but also on the fundamentals of the different asset classes along with the macro-economic factors of the countries that they have invested into.
In the current scenario, another important factor that is bothering our investors is the way Indian markets have been showing positive energy in the last few months. For instance, India’s benchmark index that is S&P BSE Sensex has moved up from levels of 20,000 to ~ 26,000 during the time period of February 2014 to July 2014. Hence, the question being asked by investors is this: “Is the grass really greener on the other side?”
We are not denying the fact that Indian markets definitely look attractive from a longer term perspective. However, a portfolio having only domestic funds will expose an investor to a concentration risk and hence, this needs to be avoided. Thus, one of the biggest advantages of having a global fund in a portfolio is to provide diversification to the same. Having said that, we are very clear about the fact that only investors with a clear understanding of the risks involved with these funds and who have the required time horizon should take an exposure into this category.
At this juncture, we would like to introduce our investors to a New Fund Offer (NFO) being launched by DSP BlackRock Mutual Fund. DSP BlackRock Global Allocation Fund is an open-ended Fund of Funds investing into BGF Global Allocation Fund (BGF-GAF). BGF-GAF is the largest actively managed fund which has a flexible mandate to invest across asset classes, countries and even currencies. This fund is managed by a team of 45 members and normally invests in more than 700 securities with no market capitalization bias and is currently spread across 40 countries in 30 currencies across sectors.
BGF – GAF will invest at least 70% of the fund’s assets in Stocks, Bonds (including non-investment grade) and Short term securities issued by companies and governments/authorities worldwide. The remaining 30% may be invested in financial instruments of companies or issuers of any size in any sector of the economy globally, such as equity securities consistent with the fund’s objective and cash. The fund will generally invest in securities that show characteristics of being undervalued. The fund may also invest in distressed securities and emerging markets (such as Brazil, South Africa and South Korea). The fund will also invest into stocks of small and emerging growth companies.
The biggest plus point of this fund is that the decision of asset allocation is driven by intense research-backed processes. As far as the selection of equity goes, the fund management team follows a fundamental bottom-up approach. The basic underlying principle used to select equities will be valuation while giving due emphasis to other factors like projected growth rates, currency outlook, central bank policies, etc. For the Fixed Income side, the approach would be to create a portfolio of risk-adjusted high yielding instruments. The investment team will undertake a thorough analysis of the credit quality, yield/spread and even currency before constructing the fixed income portfolio. It needs to be noted here that although the team has the flexibility to select instruments of any investment grade, yet under normal circumstances, only 35% of the same will be non-investment grade.
While choosing between the asset classes i.e. equities and debt, the fund looks at a number of factors, such as the relative opportunity for capital appreciation, capital recovery risk, dividend yields and the level of interest rates paid on debt securities of different maturities. Finally, the fund may use derivatives to hedge markets, interest rate fluctuations and currency risks and for efficient portfolio management.
Our take on this NFO
Since the parent fund is available for investment on our Singapore and Hong Kong platforms, we decided to approach Will Shum, who heads the Research Desk in Hong Kong, to give his views on the Fund. Will’s take on the fund was on these lines: “The fund has a flexible investment mandate to invest in Equity and Fixed income classes which can include investment and non-investment grade bonds as well. Its flexibility allows it to generate potentially higher returns for investors. As compared to other funds in the Global Balance Category available on our platform, the fund has shown stronger risk management ability.”
We would however recommend this fund only to our moderately aggressive and aggressive investors who wish to be a part of a global fund which is true to its title of being global. The fund definitely carries with it several risks like credit risk, currency risk, emerging market risk, smaller companies risk, etc. and hence can be subject to volatility. However, the fact that the fund is aggressively diversified not just across equities and sectors but also geographically and asset class-wise gives us the confidence that it will be able to generate a good amount of alpha over a long time period. Hence, only investors with the appropriate risk profile should consider taking a 5% allocation into this fund and in this way can be a part of a global investment theme.
New Fund Offering Details
|Nature of the Fund
||Open Ended Fund of Funds,Equity:Global
|NFO Opens on
|NFO Closes on
|Minimum Investment Amt.
||36% S&P 500 Composite; 24% FTSE World (ex-US); 24% ML US Treasury Current 5 Year;
16% Citigroup Non-USD World Government Bond Index
||Jay Kothari & Laukik Bagwe
||1% if redeemed/ switched out within 1 year of units allotted