GEM GAZE
April 2010

Beyond boundaries...

Not all markets move in tandem. At one point in time, one market could be surging, another could be struggling. Travel ahead and the positions could get reversed. With the emergence of overseas funds — Indian mutual funds that invest wholly or partly in foreign securities — as a feasible investment option, these numbers could shape your portfolio returns. Many of the funds use the Fund of Funds route for investing abroad, by investing in a global fund of the parent fund house abroad. Some even invest directly in international stocks. But which overseas funds should you invest in?

Out of the nine global funds discussed below, four funds have exhibited qualities worthy of a GEM. The three GEMS of 2009 have retained their esteemed status with the new entrant, Mirae Asset Global Commodity Stocks Fund, the fourth GEM, topping the list in the 2010 GEM GAZE.

Principal Global Opportunities Fund

The Principal Global Opportunities fund, whose AUM stands at Rs 125.44 crores on March 31, 2010, has notched up returns of 45.37 per cent vis-a-vis the category returns of 53.65 per cent during the past one year. The fund uses the money collected to buy units in the parent fund, the PGIF Emerging Markets Fund, which uses this money to buy stocks in a number of countries and across a number of currencies. Expense ratio of 1.18% and portfolio turnover ratio of 10% are reasonable. But the beta of 2.56 makes the fund highly risky.

Templeton India Equity Income Fund Gem

Funds that directly invest abroad have it better than the feeder funds that allocate all their assets to the parent fund. Templeton India Equity Income Fund is relatively insulated against the currency risks since its mandate is broader. These funds directly invest in stocks in India and abroad. The total number of stocks in the portfolio is 44, with the top five holdings comprising 33.08% of the portfolio. The AUM as on March 31, 2010 is Rs 1191.2 crore. The fund has surpassed the one-year category average return of 82.47% by clocking an impressive 88.85 %. Financial services, metals, and energy constitute the top three sectors. While the expense ratio at 2.01% is on the higher side, the portfolio turnover ratio of 6.65% and beta of 0.91 are quite reasonable.

Fidelity International Opportunities Fund Gem

Fidelity International Opportunities Fund is not a pure global fund, as it has a mandate to directly invest only up to 35% in international markets (biased towards Asia ex Japan) and at least 65% must be invested in Indian equities. The AUM of the fund is Rs 641.21 crores as on March 31, 2010. The expense ratio and portfolio turnover ratio are 2.14% and 59% respectively. The one-year returns are slightly above the category average of 82.47% at 83.88%. With a high beta of 15.46, the fund is excessively risky, but the broad mandate that the fund enjoys moderates the effect of risk. Financial services, energy, and technology occupy the top three sectors. The top five holdings constitute 23.03% of the portfolio which has 68 stocks. This diversification further serves to reduce the risk.

DWS Global Thematic Offshore Fund

This is a feeder fund that invests 94.72 % of its portfolio in DWS Invest Global Thematic Fund. The AUM was a paltry Rs 45.05 crore on February 26, 2010. The expense ratio is reasonable at 0.75%. The one-year return of 26.44% as against the category average of 53.65% is a display of dismal performance by the fund.

Sundaram BNP Paribas Global Advantage Fund Gem

Sundaram BNP Paribas Global Advantage offers investors exposure to three asset classes – emerging markets, real estate, and commodities. All three asset classes are played by investing in funds that deploy assets in stocks of companies. The fund offers about 40% exposure to Asia, 15% to Latin America, 15% to Emerging Europe, 15% to real estate, and 15% to commodities. This is neutral asset allocation. The actual portfolio will be overweight or underweight in one or more of these spaces relative to the model. Any appreciation in INR vis-à-vis the USD can have a negative impact of returns while depreciation in INR vis-à-vis the USD can help augment performance. The magnitude of impact on performance could be less than that of the currency movement. This is because the effects will be neutralized partly by how the underlying currencies of countries in which the sub-funds are invested move vis-à-vis the USD.

The portfolio is a tad concentrated with a mere 11 stocks, with the top five holdings constituting 84.38% of the portfolio. But the beta of the fund is reasonable at 0.62 indicating tolerable risk. The AUM of the fund is Rs 130.93 crore in March 2010. The expense ratio is very low at 0.12%. The one-year returns at 50.71% fell short of the category average of 53.65 by a narrow margin.

ICICI Prudential Indo Asia Equity Fund

AUM of the fund is Rs 478.01 crore as on March 31, 2010. The total number of stocks in the portfolio is 25 with the top five holdings constituting 56.86 %. Finance, energy, and technology are the top three sectors in the portfolio. The portfolio turnover ratio is 181% which explains the high expense ratio of 2.26%. The one-year return of 74.16% lags behind the category average of 82.47% by a huge margin.

Mirae Asset Global Commodity Stocks Fund Gem

Mirae Global Commodity Stocks Fund has a mandate to invest up to 35% of its portfolio in stocks of commodities and related companies in India and at least 65% of the portfolio is invested overseas in Asian and Emerging Markets. Though a relatively new fund, Mirae Asset Global Commodity Stocks Fund is the top performing global fund in India over the one year period. The one-year return of the fund is 68.16% as against the category average of 53.65%. Services, energy, and metals form the top three sectors of the portfolio with a mere Rs 52.55 crores (AUM) being invested in 41 stocks. The portfolio turnover ratio is 65%. The expense ratio is very high at 2.5%.

Kotak Global Emerging Market Fund (AUM of Rs 218.38 crore) and Fortis China India Fund (AUM of Rs 88.42 crore) have been the worst performers. The net asset values (NAVs) of these funds, since inception, have declined 3% and 6% respectively.

...skim off the cream

Overall, the performance of international funds has been a mixed bag. Include only the solid funds sparingly in your portfolio so as to sail over the sordid scenarios that spring up in several states (countries) at different points of time.