International funds: No FANG for the buck in last 3 monthsThe sharp ascent of international mutual funds investing in the US stocks has hit an air-pocket. In the last three months, concerns over rich valuations, capped business prospects and slashed earnings estimates have slowly hit American firms, especially those in the technology pack. With most US funds having significant exposure to the stocks, clearly their performance have been affected. The large gains in the past 12-15 months notched up by US-centric mutual funds have reduced thanks to the decline in prices of FANG stocks (Facebook, Amazon, Apple and Google parent Alphabet). Read on.

An American Affair

International equity mutual funds have been chart-toppers for quite a while in 2018. Power packed performance by the US tech stocks and a weak rupee helped the funds, especially those investing in American stocks. However, it is on the last lap of this year that there has been some let down. In the last one month, some of the US funds have lost upto 7%. In the last three month period, losses mainly range between 4-11% for lump sum investments. The tech-heavy Motilal Oswal Nasdaq 100 ETF has lost the most, while ICICI Prudential US Bluechip Equity Fund, thanks to its diversified approach, have escaped the brunt of losses.

The good thing is that one-year and three-year returns are still healthy, even after the three-month onslaught especially in tech stocks. US funds offer a wide variety of stocks, but top holdings concentrated in one sector can often defeat the original purpose of seeking diversification.

In the below table, look at the US fund returns. We have also given the top five holdings (as a % of net assets) so you have greater clarity.

The returns hit a bump

US Fund Name Top 5 holdings 1-month % 3-month % 1-year % 3-year %
Franklin India Feeder Franklin US Opportunities Fund Amazon, Apple, Mastercard, Microsoft, Alphabet -0.9 -8.92 18.37 11.29
ICICI Prudential US Bluechip Equity Fund Amazon, McDonalds, Comcast, Philip Morris, Mondelez 0.19 -1.15 18.2 13.52
Reliance US Equity Opportunities Fund Booking Holdings, Iqvia Holdings, O Reilly, Visa, Enbridge -2.47 -4.98 15.52 2.18
Edelweiss US Value Equity Off-shore Fund Bank of America, Pfizer, Wells Fargo, J&J, Capital One -1.98 -4.31 9.38 8.56
Kotak US Equity Standard Fund Apple, Facebook, Microsoft, SPDR S&P500 ETF, JPMorgan -2.42 -5.7 10.68 10.86
DSP US Flexible Equity Fund Apple, Microsoft, Alphabet, Pfizer, JPMorgan -2.89 -6.7 11.91 11.33
Motilal Oswal NASDAQ 100 Exchange Traded Fund Apple, Microsoft, Amazon, Alphabet, Facebook -6.92 -11.14 16.64 14.91
Aditya Birla Sun Life International Equity Fund – Plan A Unilever, Berkshire, United Tech., Salesforce, Microsoft -0.6 -3.51 15.35 7.79
* As on November 30, 2018 Holdings as on October 31, 2018

Lost in America

In the famous FANG club (Facebook, Amazon, Netflix, Google -Alphabet), the last few months have not been that great for investors. Automatically, Indian investors who are exposed to these stocks via US equity funds have had to take a share of those notional losses.

In the last three months, the Facebook stock has lost nearly 18%. Apple has lost over 19%. Amazon has lost 13% on its own. Alphabet has lost the least with 7.8%. Microsoft has turned out a much resolute performance than the FANG club. Netflix is a minor exposure, but it too has lost 20% value in last three months.

Analysts covering US stocks say that FANG stocks as a whole had seen a lot of gains, and so investors have used various reasons to take some money off the table. This is a reason why FANG stocks even after double digit percentage correction in the last three months, still sport quite chunky gains in the last one-year period.

Here is a look at how some marquee US tech stocks have performed.

The FANG shock

Stock 1-month % 3-month % 1-year %
Amazon 7.89 -13.01 55.26
Apple -9.3 -19.07 8.95
Microsoft 4.06 0.34 37.38
Alphabet 4.37 -7.84 9.49
Facebook -5.9 -17.57 -18.36
As on Dec 3, 2018 closing

RupeeIQ take – We believe that investors looking at US funds must ensure that they invest in schemes that have true diversification. Buying different funds that actually end up buying same set of stocks or sectors is not really diversification. Nowadays, many domestic focussed equity funds too buy US stocks. So, portfolio overlap could happen between domestic holdings and overseas holdings. Also, do remember that international equity MFs are taxed as debt funds. Yes, international equity funds are taxed like a debt fund which means long term capital gains (LTCG) tax is 20% (plus surcharge, if applicable and cess) with indexation if units are held for more than 36 months and short term capital gains (STCG) tax is at the income tax slab rate if units are held for less than 36 months.

Author
Rahul Sharma

Rahul Sharma is a contributing writer with RupeeIQ. He can be contacted on contact@rupeeiq.com