Category: Investing Insight

Why Now?

Here are the top 5 reasons why investors should look at European equities:

1. The ECB’s $1.1 trillion bond-buying program is beginning to kick in.
2. The slide in the euro’s value against the dollar has also made European exports more competitive.
3. Valuations appear attractive.
4. Eurozone corporates are less leveraged, and their profitability has remained resilient.
5. Greece is a source of uncertainty. Investing during uncertain times bears outsized returns.

How?

Unless you have a foreign equities trading account, the only way you can invest in European equities are through feeder funds or international funds. Feeder funds are just a wrapper around another fund. One such fund is the Religare Invesco Pan European Equity Fund. It feeds into the Invesco Pan European Equity Fund (MorningStar.)

It can be argued that investing in a narrow geographic is riskier compared to investing in a broad international fund. We had highlighted one such fund, the Birla Sun Life International Equity Fund Plan A, in our post about investing in non-rupee assets. If you compare the two, between 2014-03-03 and 2015-06-25, Religare’s fund gave an IRR of 1.27% vs. Birla’s 7.14% Although this blows when compared to the CNX Midcap (IRR of 48.41% in the same period), remember that investing is all about prospective returns.

Risks

There is always the risk that Greece will blowup and drag Italy down with it, causing the Eurozone to implode. Tack on the risk of active management and currency risk (the rupee might appreciate against the euro), it becomes a pretty scary proposition. But remember, investing during uncertain times bears outsized returns.

Call us to discuss whether this fund is right for you.

Introduction

Indian investors have a significant home bias – we tend to hold a high proportion of our portfolio, sometimes 100%, in Indian assets. However, if you look at how the rupee has behaved vis-a-vis the US Dollar, the advantage of international diversification becomes obvious.

USDINR has been a one-way trade

Historically, the rupee has only depreciated against the dollar. It is the price we pay for being a socialist democracy with poor fiscal responsibility and an unaccountable central bank.

Depreciation quantified

Nifty investors have seen an IRR of 821% since 1991 and today. However, in dollar terms, the IRR is 286%. The difference of 535% is because of rupee depreciation – even if you had held on to a non-productive dollar asset, you would have made that much in rupee terms.

Diversification benefit

By being long only Indian assets, your fate is tied to the vagaries of the local market participants, regulators and politicians. In a country where most people have dual-SIM phones, it is surprising that most investors are willing to hitch their ride to that pony.

One of the oldest international funds is from Birla Sun Life, let us see how that fared since the financial crisis:

Between 2008-01-01 and 2015-06-15, Birla Sun Life International Equity Fund Plan A- Growth has returned a cumulative 69.99% with an IRR of 7.37% vs. CNX Midcap’s cumulative return of 32.36% and an IRR of 3.83%. It has a beta of only 0.12825 vs. the Midcap index. (MorningStar)

Caveats

The biggest problem with investing in international funds is manager competence. All the reasons we highlighted in our post, Funds that (also) invest in foreign markets, apply. At the end of the day, you are still investing in equities and equity markets are (loosely) correlated. However, investors are better off choosing a pure international equity fund rather than one where the “international” part is a hobby.

The second problem is that there are some funds that invest in emerging Asia or frontier markets. These funds are not really long the dollar. Investors should pay attention to this detail.

Conclusion

Investing in international funds makes sense from a depreciation and diversification point of view. In our Aggressive Fund portfolio, we assign 30% of investor allocation to international funds.

Introduction

During our discussion on Relative Strength Spread, we saw how the relative performance between winners and losers were compressed in the bear markets of 2011, 2012 and 2013. During these doldrums, most active investment strategies fail to outperform their benchmarks. Since most mutual fund investments span multiple bull and bear markets, it makes sense to have a look at how funds performed in the most recent bear market.

For our analysis, we took funds that had more than 90% allocated in equities and ignored sector and international funds. We then applied the same benchmark, the CNX Midcap Index, to make sure that we had an apples-to-apples comparison. A total of 200 funds were analyzed.

The 10 worst funds

Information Ratio

Sharpe Ratio

Beta

Bear Beta

Draw down depth

Draw down length

The 10 best funds

Information Ratio

Sharpe Ratio

Beta

Bear Beta

Draw down depth

Draw down length

Conclusion

The Birla MNC fund stands out as one having the most points in its favour: low and shallow drawdown, better sharpe and higher returns. The next stand outs were the Axis Long-term equity fund and the Mirae Asset Emerging Bluechip Fund.

In terms of the worst funds, HSBC Progressive Themes was definitely regressive to your wealth. JM Basic and Sundram SMILE funds also laid a deuce.

Mutual funds are marketed as wealth builders. However, the truth is that most of them struggle. At last count, there were more than 5300 different schemes that you could choose from.

Are you getting the right advise? Get in touch with us if you are looking to invest! Call us or Whatsapp us at +918026650232