US and China focussed mutual funds have recovered, as if Covid-19 triggered market crash never happened!
Unless you have those rare funds that have been able to protect your wealth a little better than most others, the typical Indian mutual fund investor in the last three months would have seen a decline of 20-25% of in portfolio. Of course, pharma funds have given positive returns even in this market, but just 1% of equity assets are in such funds, meaning that this uptick was missed by most MF aficionados. In this backdrop, the returns of international funds are eye-popping. NAVs of US and China focussed funds have recovered from the dip seen in the peak of coronavirus crisis. Let us look at how the return picture looks. Do bear in mind we are not telling to straightaway buy funds that invest in overseas stocks. Any investing decision should be done in the overall frame-work of your personal asset allocation target. But this helps understand why geographical diversification can be a part of your portfolio allocation strategy.
Though the coronavirus outbreak has been a global outbreak, some countries are at least officially more or less affected than others. America has 1.4 million total cases, Spain has 0.27 million, Russia has 0.25 million cases, UK has 0.23 million cases and Italy has 0.22 million cases. These are five worst affected. Officially China has 83,000 cases while India has over 78,000 cases.
But stock market returns in the recent past have not been in sync with the total case count. The Dow and S&P500 of America are down 13-18% year to date, but NASDAQ is down just 1.2% YTD. America neighbour Canada’s TSX is also down about 13%. Spain index (IBEX 35) is down 30%. Russia’s MOEX is down just 13% YTD even though it is 3rd worst affected. UK’s FTSE 100 is down 22%, almost comprabale to India Nifty’s decline of 23% YTD even though India is 12th on the worst affected country list. Surprisingly, China, the country where Covid-19 originated, has seen its Shanghai CSI 300 index lose just 6% in the year to date period.
The US and China markets have staged a strong recovery. But, emerging markets like India are still some way from a sustainable rebound, given the fear of a second wave. Massive fiscal and monetary stimuli have been announced around the world to deal with Covid-19 pandemic. India lags presently with fiscal stimulus of ~0.7% of GDP, but more expected gradually since the Prime Minister announced a mega Rs 20-lakh crore package.
Mutual funds have moved in sync with the sentiment in the prevailing market. A big exception to this has been international funds. Even if you are an Indian, overseas funds allow you to take a different geographical bet. And, looking at returns, that bet has paid off well.
In India, largecap funds are down 21% YTD period. Multicap funds are down 20%. Smallcap funds are down 22%. Banking sector funds are the worst hit at 38% average cut. Only pharma are up 16% YTD. Energy, IT and consumption funds are relatively less hit, but losses are still there. Unless you had the super intelligent insights to buy beaten-down pharma funds (and gold funds), equity funds performance generally is a range of different losses.
In international funds, investors have found succour. US and China have done better, but it is important to see what worked even among these sub-groups. In China funds, Edelweiss Greater China Equity Off-shore Fund has clocked 7.5% YTD but the Nippon India ETF Hang Seng BeES is down 8.83%.
In America focussed funds, not all have a green slate in the YTD period. ICICI Prudential US Bluechip Equity Fund (-6.61%), DSP US Flexible Equity Fund (-8.44%), and Edelweiss US Value Equity Off-shore Fund (-16.55%) represent one end of the spectrum. At the other end are Motilal Oswal Nasdaq 100 FOF – Regular Plan 11.37%, Motilal Oswal NASDAQ 100 Exchange Traded Fund 10.43% and Franklin India Feeder Franklin US Opportunities Fund 7.95%. Nippon India US Equity Opportunities Fund was down 1.85% YTD.
For US funds, the last 1 month period have been very strong. Edelweiss US Technology Equity Fund of Fund leads the chart with 13.84% gain, followed by Motilal Oswal NASDAQ 100 Exchange Traded Fund 12.31%, Motilal Oswal Nasdaq 100 FOF 11.00%, Franklin India Feeder Franklin US Opportunities Fund 10.30%, Nippon India US Equity Opportunities Fund 9.03% to name a few. DSP US Flexible Equity Fund 3.11%, Edelweiss US Value Equity Off-shore Fund -1.03% and ICICI Prudential US Bluechip Equity Fund -1.16% have been laggards. In the same time i.e. last 1 month, Indian funds brought investors some good tidings. The gains for most categories were 3-4% in last one month.
Take a look at the best-performing international funds (arranged in order of 1-month returns).
|Fund Name||1 Wk (%)||1 Mth (%)||3 Mth (%)||6 Mth (%)||1 Yr (%)|
|DSP World Gold Fund||2.89||20.73||25.72||36.78||68.87|
|PGIM India Global Equity Opportunities||7.87||15.99||5.48||22.71||26.27|
|Motilal Oswal NASDAQ 100 ETF||5.46||12.31||3.90||19.80||32.80|
|Motilal Oswal Nasdaq 100 FOF||4.57||11.00||4.01||20.27||30.90|
|Franklin India Feeder Franklin US Opp Fund||2.27||10.30||-0.06||15.75||20.95|
|Nippon India US Equity Opp Fund||4.08||9.03||-5.01||4.51||13.78|
|DSP World Mining Fund||2.28||8.66||-3.74||1.56||6.94|
|Principal Global Opportunities Fund||3.56||8.29||-15.13||-9.41||-2.63|
|Aditya Birla SL Global Emerging Opp Fund||4.14||7.56||-2.73||6.06||12.62|
|Edelweiss Greater China Equity Off-shore||3.40||5.95||3.44||15.27||28.43|
Most sophisticated investors buy international funds to reduce risk to their portfolio. And as recent performance shows, this geographical diversification.
Here are some facts. A 50% India funds + 50% international funds portfolio would outperform a 100% India funds portfolio by 6-9% in last 3 months. We tested this for India fund categories like Large Cap, Large & MidCap, Multi Cap, Mid Cap and Small Cap with average returns.
If you only took US funds (instead of international funds average), then the outperformance would be larger. A 50% India funds + 50% US funds portfolio would outperform by 9-12%.
Mind you that one should not base their investing decisions by looking at short-term performance. MF investing is more about three year or more time horizon. And international funds are not always going to give rosy returns. Investors have tasted this first-hand. Take the case of some US funds as an example. In just a quarter between Sep 24, 2018 to Dec 24, 2018, Franklin India Feeder Franklin US Opportunities Fund lost over 25%. Even the top-performing Motilal Oswal NASDAQ 100 Exchange Traded Fund wasn’t immune to this.
US funds or international funds are not just a choice only when Indian markets perform badly. Every category of equity funds has their own pros and cons. The kind of diversification international schemes give you is necessary. International firms, generally in developed markets, provide stability and good governance, unlike many domestic companies. There is a revenue differential, currency differential, where these companies and big markets are different from Indian markets and it is a huge opportunity.
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