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Looking Beyond Borders

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

If you had invested in funds focused on international markets rather than the Indian equity markets, in the last few months, you may have pocketed better returns. "Of late our domestic markets have been gripped with various issues like the banking and real estate loan news, scam news, 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 federal government's quantitative easing programme or QE2, has injected a lot of liquidity into the system, which has moved up the prices of real assets, be it commodities or equities," says Gopal Agrawal, deputy chief information officer and head, equity, Mirae Asset Global Investments (India). International equity funds have returned anywhere between 7.5 per cent and 28 per cent in the last 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 return delivered by the BSE Sensex and 3.5 per cent by the average Indian diversified equity fund. However, according to Patil, not all global funds have outperformed especially the China-dedicated funds.

 Global Fund of Funds

A large number of global funds adopt a fund of fund route for investing in the global markets. This essentially means these funds invest in securities of other mutual fund schemes. Mirae China Advantage Fund, for instance, primarily invests in Mirae Asset China Sector Leader Equity Fund managed by its global arm, Mirae Assets Global Investments.

The latter's objective is to invest in equities and equity-related securities of companies domiciled in or having their area of primary activity in China and Hong Kong. For an investor, investing in these funds is no different from putting money into any other domestic fund. It is an easy way to get access to global securities. Since most fund houses already have global funds managing overseas assets, such funds typically leverage their expertise. However, the tax treatment of a fund-of-fund is similar to that of a debt fund.
THE COMMODITY BOOM

The top five global funds that gave returns above 20 per cent were commodity funds, be it agriculture, metals or energy. Topping the charts was the ING OptiMix Global Commodities fund. "This performance can be attributed to the strengthening of commodity prices, which has been a function of global growth and inflation. Commodities will continue to do well in the high inflationary scenario, except if global growth derails," explains Arvind Bansal, VP & head - multi manager investments, ING Investment Management India.

Birla Sun Life Commodity Equities - Global Agri fund almost matched ING OptiMix's performance. Patil thanks the fund's focus on companies that directly benefited from higher commodity prices, for the stellar show. Exxon Mobil, buoyed by the increase in the prices of crude, Monsanto Company, high on the rising prices of agricultural commodities and gold mining company, Barrick Gold Corporation were among the fund's favourites. In the last quarter alone, commodities such as aluminium, copper and silver have appreciated by about 20 per cent, while the agricultural index - an index that tracks commodities such as wheat, corn, soybean and sugar has seen a run-up of about 31 per cent.

Will the end of 2010 spell the end of the commodity boom? Perhaps not. Analysts are expecting 2011 to be as good. And the only way, according to them, to partake in this rally is by investing globally, since global stocks provide the maximum leverage to rising commodity prices unlike Indian companies that have a limited impact. For instance, in India there are hardly any listed copper companies except companies such as Hindustan Copper, in which the government owns a 99 per cent stake. Similarly, for giants such as Coal India, prices are regulated, according to fund managers.

Going forward, with no signs of inflation coming down, Indian stocks are not expected to give great returns over the next 6 months, while commodity funds are expected to gain further. 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 believe that investments in commodity funds should not go beyond six months to one year, since commodity trends do not last for too long. Also, it may be wise to invest in multi-commodity funds. By doing so you can get exposure to the global economic growth spanning energy, agriculture, industrial metals, precious metals and even water, fund managers say. Not to mention the diversification advantage.

DIVERSIFIED OPTION

For the 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 last 1 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 time investors should start by investing in the US markets by way of the Standard & Poor's (S&P) 500 Exchange Traded Fund (ETF). The fund has a range of companies, even some global ones that offer their stocks by way of American Depository Receipts (ADRs). For the stock-savvy investor, Thakkar recommends individual stocks, since many scrips on the ETF may be risky.

The performance of commodity funds can be attributed to strengthening of prices, a function of growth, inflation.
Arvind Bansal
ING Investment
Management India
"For instance, we do not know if US financial companies are out of the woods yet or whether housing stocks will do well." Also, with the US corporations 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%, says Agrawal.

Thakkar, however, is of the view that 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 at price earning (PE) ratios of between 15 and 16. MasterCard is another of Thakkar's top pick, trading at that valuation.

An additional factor prompting global investments is the disparity in valuations between Indian and overseas stocks of some companies. Nestle India for instance, trades at a PE ratio of between 40 and 45, about three times the valuation of the parent company, according to Thakkar.

Agrawal, bats for Chinese stocks, now that most negatives are already priced in. "Its (China's) manufacturing excellence, the strong per capita income growth, the strengthening of its banking system and its valuations at 11 times earnings, puts it in a better spot now," he explains. To become a part of the Chinese story, investors can opt for the Hang Seng Benchmark Exchange Traded Scheme (BeES), launched by Benchmark Mutual Fund earlier this year.

With the number of choices increasing, it certainly is time to look beyond the Indian bourses.