Foreign returns: US-focussed funds trump domestic equity schemes

Most investors in domestic equity funds continue to face the brunt of the severe market corrections and volatility in the Indian markets over the past one year. On the other hand, diversifying and investing in fund-of-funds (FoFs) or ETFs that are focussed on the US would have delivered solid returns.

US-focussed funds have outperformed domestic diversified equity schemes by a handsome margin not just over the past six months, but also over longer timeframes of one and three years and, in some cases, over even longer periods. There are six FoFs – domestic funds investing in their respective parent’s/others’ mutual fund units in the US – and one ETF focussed on the US.

In the past one year, these US-focussed funds delivered 15-29 per cent returns, while domestic diversified equity schemes witnessed, on average, a 6.2 per cent decline in their NAVs. Over a three-year period, the outperformance of US-focussed FoFs has been to the extent of 3-13 percentage points over the domestic equity schemes’ average returns.

The weak rupee vis-à-vis the US dollar was not the only reason for this outperformance. While the rupee slid against the dollar by 13 per cent in the past six months, the exchange rate had been largely stable over the October 2013-January 2018 perid at 63-65 levels.

The uptick in the US economy in recent years also helped US-focussed funds outshine domestic equity funds. US markets have been rallying for the past few years, backed by healthy GDP growth, record-low unemployment figures, and higher corporate earnings. Rising interest rates, which led to higher portfolio inflows to the US,also fed the rally.

De-risking the portfolio

Given the performance of US markets and the structural depreciation of the rupee against the dollar over the past decade or so, should domestic investors look actively at US-based FoFs?

Anil Ghelani, Head of Passive Investments and Products, DSP Investment Managers, says, “Investors can benefit from the rupee depreciation over the medium to long term by taking exposure in international funds, especially US-based funds. These funds can help investors hedge the currency risk to the domestic portfolio. They may also reduce the risk to the overall portfolio by allocating between assets that have the same return potential but have minimal correlation.”

Anand Radhakrishnan, MD & CIO – Emerging Markets Equity, Franklin Templeton Investments – India, suggests systematic investments in overseas funds. “We don’t think investors should look to time the markets, but instead invest both in domestic and overseas markets on a regular basis and in a systematic manner. We recommend that investors come in with a 3-5 year horizon or longer,” he says.

He also highlights the investment variety available in the US and other overseas markets. “Such investments help investors access global leaders in products/technology/services and piggyback on their growth,” Anand observes.

Asset allocation

As with all investments, allocation to US-based funds too must ideally be done as part of an asset allocation exercise. Those looking at financial goals linked to the US too can choose to invest. The proportion allocated would vary across investors.

Says Anil of DSP Investment managers, “The proportion and the need for incremental allocation may differ from case to case. This option could be worthwhile for those planning to send their children to study abroad or are considering a foreign vacation in the future.”

Anand of Franklin Templeton Investments suggests, “typically, the exposure would depend on the individual’s risk profile and investment objective, but as a thumb rule, one should have at least 20 per cent of one’s investment portfolio allocated to international assets.”

However, Manish Gunwani, CIO – Equity Investments, Reliance Mutual Fund, strikes a note of caution. “After the recent sharp depreciation of the rupee, the probability of further sharp depreciation is low; hence, US-based funds were more attractive a year ago rather than today. Also, given the current high base, one needs to be a bit cautious about extrapolating the current US growth into the future,” he says. “Currently, post the sharp depreciation of the rupee, we don’t recommend international funds strongly.”