When Developed Markets Begin to Appeal
With a good dose of negative news about the Indian economy being circulated every day, investor interest in international markets appears to be on the rise. While quite a few fund houses have already launched international funds to fulfill this need to look beyond borders, most of them, in recent times, have been US-focused funds.
ICICI Prudential though, has sought to be a bit different with its launch of the ICICI Prudential Global Stable Equity Fund. This fund-of-fund will use the feeder route to invest in an international fund – Nordea Global Stable Equity Fund – Unhedged. This parent fund/underlying fund is domiciled in Luxembourg, Western Europe, and is an investment fund belonging to the Nordea Bank AB group headquartered in Stockholm.
What’s on Offer
ICICI Pru already has a US-focused fund in its stable. Its new fund will seek to invest in globally stable companies with moderate valuations, and which offer stable returns. The fund could therefore be viewed as a scheme with a value bias. The parent fund is benchmarked against the MSCI World Net Return Index, an index of mostly developed markets in the world.
The underlying fund has predominant country exposure to the US, followed by regions/countries such as the eurozone, Japan, the rest of Europe, United Kingdom and Canada. In its current form and strategy, it was launched in 2010. Before that, it existed with a significantly different mandate.
Currently, domestic funds that invest internationally (either directly or through the fund-of-fund route) broadly invest in the following markets/themes: emerging markets, Asian markets, the US market, specific global themes such as energy or commodity and general global investing.
Currently, non-sector funds such as Principal Global opportunities and DWS Global Thematic Offshore, which invest internationally, are also benchmarked to the MSCI World Index.
These funds have not had a great long-term record, but have seen a spurt in performance in the last 3 years, especially when viewed in contrast to the Indian market. Then, there are other international funds such as Birla Sun Life International Equity Plan A and Sundaram Global Advantage which seek to invest in diversified global equities. While the former has a good chunk in US markets, the latter has an emerging market tilt.
The Nordea Global Stable Equity Fund’s factsheet does look impressive in terms of its returns. With a return of 13.3 per cent annually over the last 1 year, as well as 3 years (up to July 31, Source: Morningstar) in the euro currency, its performance is far superior to the low single-digit returns in the Indian market. Of course, the rupee returns for the fund would be much more.
But then, it is worth noting that its outperformance over its index is not significant (at about a percentage point higher than the index over a three-year period and marginally trailing the index in the last 1 year). But that is only to be expected as this broad-based index with over 1600 constituents is not an easy benchmark to beat. Besides that, the parent fund uses a value approach which would mean losing out on plenty of growth stocks that gained in rallying markets such as the US in recent times.
The fund is suitable for investors looking to diversify their holdings outside India. Currently, with emerging market prospects not too different from India’s own fortunes, investors may be better off diversifying into markets that do not behave similarly.
That leaves US-focused funds and other diversified global funds. While currently, US-focused funds have returned higher than other global funds, exposure to the latter may help diversify currency risks. For instance, the Nordea fund would mean exposure to varying currencies such as the dollar, yen, euro and pound. While all of these currencies have gained against the rupee (anywhere between 5-11 per cent between mid-July and August 23,) currently, investors may at least diversify this part of the risk involved in an international fund.
That said, investors should not lose sight of the long-term prospects that a market like India would hold against developed markets. The MSCI World Index has not generated double digit returns over 5 or 10-year time frames and has never beaten the MSCI Emerging Market Index in broad rallies. Hence, the purpose of international funds such as these should be restricted to diversification.
Over half of the assets in the underlying fund were exposed to the US markets, as of July. The rest were in Japan, UK, Canada and other euro and non-eurozone countries. Interestingly, the underlying fund has maximum exposure to the healthcare sector, unlike the IT or consumer staples exposure often seen in international funds. Microsoft, KDDI and Aflac were among the top stocks in the portfolio.
The offer of ICICI Prudential Global Stable Equity is open for investment until September 10.