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International funds are those funds which invest into one or more markets or companies outside India as against the pure domestic funds which invest into the stocks of companies in India. International funds not only bring diversification to the portfolio of domestic investors but also help reduce the risk of investing into a single market or a particular country in a significant way. Investment in global equities complements domestic equities due to the low correlation leading to diversification benefits.
The actual benefits of international investing may be categorized as follows:
Asset Class Perspective: One of the ways to seek portfolio diversification is to invest across geographies. Investing in countries other than the home country can help reduce the risk associated with investment in a single country (risk is spread across companies, sectors and countries), and can also provide an opportunity to tap growth potential of different geographic regions, for example, US, Europe, Asia Pacific etc.
Currency Perspective: The Rupee depreciated by 13 per cent in 2013 and this helped the international funds to perform well. Rupee over a longer period of time has generally depreciated. This may benefit international funds if they are held for a longer period of time.
Country Risk Perspective: An opportunity to position the portfolio in such a way that if Indian markets fail to give returns-outperformance of international equities could reduce the country risk.
Low Correlation: Investing in low correlated assets helps to protect a portfolio from volatility and improves risk/reward ratio of a portfolio. Historically, International equity markets have low correlation with Indian equity market and thereby provide an opportunity for diversification.
Exposure to companies not available in India: Investors get exposure to international companies having global presence and run by quality management teams, for example, Facebook, Google, British Petroleum, GSK, Walmart, etc.
International funds may invest into a particular country or may invest into different countries according to the theme and objective of the fund. For example – Franklin Asian Equity Fund invests primarily in Asian Companies/sectors (excluding Japan) while Mirae Asset China Advantage Fund invests into companies domiciled in or having their area of primary activity in China and Hong Kong. These funds may directly invest into foreign stocks or invest into units of an international fund (fund of funds) which invests into foreign stocks. FT India Feeder - Franklin U.S. Opportunities Fund is a fund of fund which invests into units of Franklin U. S. Opportunities Fund while ICICI Pru US Bluechip Equity Fund directly invests into companies listed on New York Stock Exchange and/or NASDAQ. One can also invest into International funds which follow a particular theme or sector like agriculture, energy, gold, mining etc., like DSPBR World Mining Fund, DSPBR World Energy Fund and PineBridge World Gold Fund.
When we invest into domestic mutual funds there are standard risk factors associated with such funds like liquidity risk, risk due to investments into equity and equity related instruments, interest rate risk, etc. These risks are dependent on macro economic factors pertaining to the domestic country like growth, inflation, interest rates, fiscal and monetary policies etc. Apart from the standard risks associated with investments into international funds, there are other risks like currency risk, country risk, unexpected changes in foreign government regulations, etc. Currency risk is one of the main factors affecting the returns of the fund as the fund invests in overseas mutual fund or foreign securities and since the money is deployed in securities denominated in foreign currencies, the Indian Rupee equivalent of the net assets, distributions and income may be adversely affected by fluctuations in the value of the foreign currencies relative to the Indian Rupee. If the Rupee depreciates against the USD, the value of the fund increases and if the Rupee appreciates relative to the USD, the fund will see some losses.
For example: Following is the investment path if invested into an international feeder funds
The Rupee depreciated to Rs. 68 levels against the Dollar in August 2013, from Rs. 56 levels in June 2013. (Refer Chart 1) This depreciation in the domestic unit led to substantial gains in the portfolios of international funds investing in U.S. equities. The funds have generated returns in a range of 18-25 per cent during June-August 2013 period largely helped by the sharp fall in the Rupee.
Chart 1: Rupee and International Funds (June-September, 2013)
During the October 13 - March 14 the Rupee appreciated against the Dollar and stabilized in the range of 59-63 levels. (Refer Chart 2) In this period the returns on the funds were marginally positive ranging between 2-8 per cent. The positive returns were mainly due to the improved economic conditions and outlook in the U.S.
Chart 2: Rupee and International funds (October 13 –March 2014)
International funds are those funds which invest into one or more markets or companies outside India as against the pure domestic funds which invest into the stocks of companies in India. International funds not only bring diversification to the portfolio of domestic investors but also help reduce the risk of investing into a single market or a particular country in a significant way. Investment in global equities complements domestic equities due to the low correlation leading to diversification benefits.
The actual benefits of international investing may be categorized as follows:
Asset Class Perspective: One of the ways to seek portfolio diversification is to invest across geographies. Investing in countries other than the home country can help reduce the risk associated with investment in a single country (risk is spread across companies, sectors and countries), and can also provide an opportunity to tap growth potential of different geographic regions, for example, US, Europe, Asia Pacific etc.
Currency Perspective: The Rupee depreciated by 13 per cent in 2013 and this helped the international funds to perform well. Rupee over a longer period of time has generally depreciated. This may benefit international funds if they are held for a longer period of time.
Country Risk Perspective: An opportunity to position the portfolio in such a way that if Indian markets fail to give returns-outperformance of international equities could reduce the country risk.
Low Correlation: Investing in low correlated assets helps to protect a portfolio from volatility and improves risk/reward ratio of a portfolio. Historically, International equity markets have low correlation with Indian equity market and thereby provide an opportunity for diversification.
Exposure to companies not available in India: Investors get exposure to international companies having global presence and run by quality management teams, for example, Facebook, Google, British Petroleum, GSK, Walmart, etc.
International funds may invest into a particular country or may invest into different countries according to the theme and objective of the fund. For example – Franklin Asian Equity Fund invests primarily in Asian Companies/sectors (excluding Japan) while Mirae Asset China Advantage Fund invests into companies domiciled in or having their area of primary activity in China and Hong Kong. These funds may directly invest into foreign stocks or invest into units of an international fund (fund of funds) which invests into foreign stocks. FT India Feeder - Franklin U.S. Opportunities Fund is a fund of fund which invests into units of Franklin U. S. Opportunities Fund while ICICI Pru US Bluechip Equity Fund directly invests into companies listed on New York Stock Exchange and/or NASDAQ. One can also invest into International funds which follow a particular theme or sector like agriculture, energy, gold, mining etc., like DSPBR World Mining Fund, DSPBR World Energy Fund and PineBridge World Gold Fund.
When we invest into domestic mutual funds there are standard risk factors associated with such funds like liquidity risk, risk due to investments into equity and equity related instruments, interest rate risk, etc. These risks are dependent on macro economic factors pertaining to the domestic country like growth, inflation, interest rates, fiscal and monetary policies etc. Apart from the standard risks associated with investments into international funds, there are other risks like currency risk, country risk, unexpected changes in foreign government regulations, etc. Currency risk is one of the main factors affecting the returns of the fund as the fund invests in overseas mutual fund or foreign securities and since the money is deployed in securities denominated in foreign currencies, the Indian Rupee equivalent of the net assets, distributions and income may be adversely affected by fluctuations in the value of the foreign currencies relative to the Indian Rupee. If the Rupee depreciates against the USD, the value of the fund increases and if the Rupee appreciates relative to the USD, the fund will see some losses.
For example: Following is the investment path if invested into an international feeder funds
The Rupee depreciated to Rs. 68 levels against the Dollar in August 2013, from Rs. 56 levels in June 2013. (Refer Chart 1) This depreciation in the domestic unit led to substantial gains in the portfolios of international funds investing in U.S. equities. The funds have generated returns in a range of 18-25 per cent during June-August 2013 period largely helped by the sharp fall in the Rupee.
Chart 1: Rupee and International Funds (June-September, 2013)
Chart 2: Rupee and International funds (October 13 –March 2014)
Performance of Select International Funds
The year 2013 was not a smooth one for the Indian economy as we faced a number of challenges, such as a slow economic growth, high inflation, weak currency and the tapering announcement by US Fed which led to a rout in the emerging markets. If we look at the global equity markets in 2013, the developed markets like US, Germany, UK and Japan outperformed the emerging markets due to improvement in their domestic economy while India and other emerging markets saw relatively poor returns. To stem the currency depreciation last year most of the emerging economies hiked their base rates and introduced limited capital controls to reduce the currency linked damages.
Germany has been the bellwether of Europe as its economy has been growing strongly due to its exports, and UK also avoided a double recession as its service industries and domestic consumption has picked up. There is tangible and visible economic recovery happening in Europe and the US. Economic growth momentum is slowly returning due to the massive quantitative easing programs undertaken by the central banks. Sentiment indicators and consumer confidence indicators signal a sustainable recovery. As economic recovery gathers pace the earnings growth of companies and businesses also will go up along with the overall economic recovery. Euroland equities had moved down in the early part of 2013 and the recovery or rebound started happening from the second US economic growth was due to improvement half of 2013. in housing sector, domestic demand, unemployment rate coming down to a 3 yr low in Dec as corporates and private sector continued to add jobs. Inflation also remained benign as US saw record production of shale oil and gas, making it less dependent on imports. Japanese economy grew on the back of massive fiscal stimulus launched by Mr. Shinzo Abe (newly elected PM of Japan) and policy reforms to boost the economy.
Many developed economies are bottoming out and are expected to perform well. It is advisable to invest into international funds but with a proper understanding of the risk and return matrix for the country or theme that one plans to invest into. Investors looking to diversify within equity space may invest into international funds to reduce volatility and generate alpha. But one should always remember the currency risk involved and the returns may be impacted depending on how the domestic currency behaves in relation to the foreign currency. International funds should not occupy more than 5-10 per cent of the overall portfolio to avoid over exposure.
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