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Looking beyond borders

Buoyed by liquidity, global funds have beaten domestic ones over the past six months. The rally is expected to continue, especially for commodity funds.

Tanvi Verma        Print Edition: March 20, 2011

If you had invested in funds focused on global markets instead of Indian equity markets in the past f ew months, you may have pocketed better returns. "Of late, our domestic markets have been gripped by issues such as scams in banking and real estate loans, inflation etc., that have hurt sentiments," says Mahesh Patil, Head, Equity - Domestic Assets, Birla Sun Life Mutual Fund. During this period, some positive surprises have flown in from global markets. "The US government's quantitative easing programme has injected a lot of liquidity into the system, which has moved up prices of real assets, be it commodities or equities," says Gopal Agrawal, Deputy Chief Information Officer and Head, Equity, Mirae Asset Global Investments (India). Global equity funds have returned between 7.5 per cent and 28 per cent over the past six months (See Global Funds Race Ahead), with a category average of about 18 per cent. This is huge compared to the 6 per cent returned by the BSE Sensex and 3.5 per cent by the average Indian diversified equity fund. However, the China-dedicated funds have not done so well, Patil says.

The commodity boom
The top five global funds that gave returns of over 20 per cent were all from the commodity space, with the ING OptiMix Global Commodities fund at the top. "This performance can be attributed to the strengthening of commodity prices. Commodities will continue to do well in the high inflationary scenario, except if global growth derails," explains Arvind Bansal, Vice President & Head - Multi-manager investments, ING Investment Management India. Birla Sun Life Commodity Equities Fund - Global Agri Plan almost matched ING OptiMix's performance.

Patil attributed the fund's stellar show to its focus on companies that directly benefited from higher commodity prices. Exxon Mobil, Monsanto Company and Barrick Gold Corporation were among the fund's favourites. In the past quarter, commodities such as aluminium, copper and silver appreciated by about 20 per cent, while the agricultural index ran up by about 31 per cent.

Analysts are expecting the commodity boom to continue in 2011 as well. And the best way to cash in on this opportunity is to invest in global stocks since those provide the maximum leverage to rising commodity prices unlike Indian companies. For instance, in India there are hardly any listed copper companies except firms like Hindustan Copper in which the government owns a 99 per cent stake.

Going forward, with no signs of inflation coming down, Indian stocks are not expected to give great returns over the next six months. Fund managers advise investors to allocate up to 10 per cent of their portfolio to such funds. But here is a word of caution. Most analysts warn that investments in commodity funds should not be for more than a year, since these trends are prone to quick changes. And they also say it makes more sense to invest in multicommodity funds, since they not only benefit from global economic growth but also have the diversification advantage.

Diversified option
For long-term investors, diversified international equity funds could also hold value. Birla Sun Life's International Equity Plan, for instance, has returned 12 per cent in the past one year. It may not be the best among its peers but it has relatively lower exposure to volatile investments - 40 per cent in US companies.

According to Rajeev Thakkar, Chief Executive Officer, Parag Parikh Financial Advisory Services, first timers should start by investing in the US markets with the Standard & Poor's (S&P) 500 Exchange Traded Fund, or ETF. The fund has a range of companies that offers stocks by way of American Depository Receipts. For the stock-savvy investor, Thakkar recommends individual stocks, since many scrips on the ETF may be risky. Also, with the US firms posting good numbers, and the S&P 500 already trading at 13,500 levels, the upside from here on may be limited to about 10 per cent, says Agrawal.

Thakkar, however, feels some stock picking, especially investment in less volatile companies that have globally diversified businesses could bring bigger gains - such as PepsiCo and Nestle that are not dependent on the US economy alone. Their earnings are less volatile and valuations reasonable with price-to-earning or PE ratios between 15 and 16. MasterCard is another of Thakkar's top pick. An additional factor is the disparity in valuations between Indian and overseas stocks of some companies. Nestle India trades at a PE of between 40 and 45, about three times the valuation of its parent company, Thakkar adds.

Agrawal bats for Chinese stocks also. "China's manufacturing excellence, its strong per capita income growth, and the strengthening of its banking system puts it in a better spot." To become a part of the Chinese story, investors can opt for the Hang Seng BeES (Benchmark Exchange Traded Scheme). With so many choices, certainly it is time to look beyond Indian bourses.

Courtesy: Money Today 

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