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This article takes a closer look at how globally focused funds can be used by investors in India to diversify and build a global portfolio
Key Points
Global Markets Make A Turnaround in 2009 The global financial markets witnessed testing times with the surfacing of the subprime crisis. However, the year 2009 marked a turnaround for markets worldwide with economic fundamentals improving and stronger earnings growth outlook. Appetite for equities resurfaced in 2009, with investors flocking back to the asset class after risk aversion in late 2007 and 2008. Emerging markets led the recovery with Latin America and Emerging Europe topping the charts in 2009, and Asia ex Japan following close behind. Emerging markets have been receiving a lot of attention and foreign fund flows lately, with strong growth prospects, improving fundamentals and rising domestic consumption. Our favourite region for 2010 is Global Emerging Markets. The valuations of some of the emerging markets are also reasonable with major representatives like Brazil, Russia and Israel trading at P/E Ratios of below 14X. Rising inflationary expectations is also expected to benefit the resource rich countries like Brazil, Russia and Indonesia. Earnings growth for this region is expected to be 29% in 2010 and around 18% in 2011. (Refer to Table 1 for Performance, Valuations and Earnings Growth of Key International Indices). On the economic front too GDP growth for 2010 is forecasted to improve, compared to a disappointing 2008 and lackluster 2009. According to the World Economic Report released by the IMF (International Monetary Fund) in October 2009 GDP growth for advanced economies is expected to expand by 1.25% in 2010 compared to a 3.5% contraction in 2009, while for emerging economies, real GDP growth is forecast to reach almost 5% in 2010, up from 1.75% in 2009. On similar lines, the recently released Global Economic Prospects 2010 report by the World Bank cites that GDP growth for rich countries is expected to pick up to 1.8% in 2010 after declining by 3.3% in 2009. Meanwhile prospects for developing countries are more robust in 2010, with them expected to grow 5.2% this year—up from 1.2% in 2009. Table 1: Performance, Valuations and Earnings Growth of Key International Indices
Performance of Globally Focused Funds In India Presently a variety of globally focused funds are available, which not only invest in equities but also participate in other asset classes like gold, real estate and commodities. Besides this, there are global funds concentrating on certain key markets like China, Latin America and other emerging markets. Many of the funds use the Fund of Funds route for investing abroad, by investing in a global fund of the parent fund house abroad. Some even invest directly in international stocks. Table 2 highlights the performance of some globally focused funds in India. It can be seen that funds investing in commodities stocks, emerging market stocks and gold mining stocks have managed to outperform over the last one year. The top performing global fund in India over a one year period is Mirae Global Commodity Stocks Fund, which has a mandate to invest upto 35% of its portfolio in stocks of commodities and related companies in India and at least 65% of the portfolio will be invested overseas in Asian and Emerging Markets. The second best performing global fund was Fidelity International Opportunities Fund which is not a pure global fund, as it has a mandate to invest only upto 30% in international markets (biased towards Asia ex Japan) and at least 65% must be invested in Indian equities. Both these funds invest internationally through stock directly and not via the feeder fund route. Table 2: Performance of Globally Focused Funds in India
Benefits and Limitations of Globally Focused Funds The biggest benefit of a global fund is one of diversification. It allows the investor to diversify his / her portfolio geographically. All markets go through periodic cycles. There is no certainty that a particular market performing well presently will continue to outperform in the future too. Table 3 highlights the performance of some key international markets. It can be seen that China was among the top performing markets in 2006 and 2007, but was a bottom performer in years 2003, 2004 and 2005. Thus a globally focused fund will help to reduce the diversification risk of an investor and at the same time follow a professional approach of investing their funds with the requisite expertise in international markets. The other threat to global funds is the currency risk, which could at times erode a substantial part of the original gains. Table 3: Changing Fortunes! - Year-Wise Performance of Key Markets
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Dhruva Raj Chatterji is a Research Manager of iFAST Financial India Pvt. Ltd.
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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 offer document/scheme additional information/scheme information document. 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 in the website. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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