The Mutual Fund Show: Should Indian Investors Consider Adding Global Stocks To Portfolio?
Investments into global stocks can help Indian equity investors diversify their portfolios. And mutual funds offer them the opportunity to take exposure to overseas listed companies, providing a hedge against domestic performance.
For example, U.S. stocks have fared better than Indian equities in four of last five years. Any exposure to the U.S. indices may have helped Indian investors either improve returns or provide a cushion.
Motilal Oswal Asset Management Company has launched the S&P 500 Index Fund to enable investors to buy into the broader U.S. market. Investment in such global funds gives an investor the diversity, balance to Indian equity performance and a hedge against the rupee depreciation, Aashish Somaiya, managing director and chief executive officer at Motilal Oswal AMC, said in BloombergQuint’s Mutual Fund Show.
Tarun Birani, founder and director at TBNG Capital Advisors, however, suggested that overseas investments should not be more than 15-20 percent of an investor’s portfolio even if the past returns are enticing. And he cautioned that these investments should have no or limited correlated with Indian assets or equities in the portfolio; otherwise, the very purpose of diversification will be defeated.
While Birani recommended ‘subscribe’ to the Motilal Oswal S&P 500 Inded Fund new fund offer, he said other options like the Franklin US Opportunities Fund are also attractive.
Watch the full show here to know more:
Here are the edited excerpts from the interview:
I think a lot of people over the last few days have drawn comparisons of what’s happening in the world markets versus what’s happening in India and is there merit in trying to diversify not just within debt, equity and gold, but also within geographies in which you invest — which is India versus some of the others. Let’s get in Aashish Somaiyaa from Motilal Oswal AMC to talk about the impact of this geographical diversification. What percentage of your portfolio should ideally be in that? And what are the existing options and what is their new fund offer all about?
Tell us Ashish, as somebody who is probably an investor himself, how much of an importance do you give to this geographical diversification theory?
Aashish: I think it is definitely very important because diversification by nature, by the very word, it means that you must have a bunch of low correlation or no correlation kind of assets in your portfolio. Now, admittedly, every once in a while when the world seems to be like it’s falling apart, so at those times, it’s quite natural that all assets do get correlated, but if you take a long period average like 5 years, 10 years, what you will find is that some of these fund, say in the last 7-8 years we have a NASDAQ fund and now like you mentioned, we are coming up with S&P 500, some of these funds’ correlation with the Nifty 500 is as low as 0.1-0.14. So my sense is that this makes a lot of sense for people. I don’t know what exactly is the percentage it should be, but in my sense, a good guess is that anywhere between 15 and 20 percent should be in these kind of assets.
Am I getting this correct? You are saying that out of the total exposure, total equity exposure that a person has, 15-20 percent of that could be in non-Indian equities—be it direct or through mutual funds?
Aashish: Yes, because for Indians, it’s a new concept. But globally if you actually look at it, it’s not something which is alien to people.
Would you care to elaborate? Are there trends that people globally have followed which Indians could look at as well? I mean, and how much do they help any, any thoughts, any theories or any data on that?
Aashish: The simplest thing that one can really think about is that what does India do vis-à-vis the rest of the world. So, take a simple thing that somebody has put this global emerging market as one particular block, and then you put the developed world as one particular block. But we all know that global emerging market meaning is just a haphazard clubbing, all emerging markets are not really the same. I mean, there are some emerging markets which are heavily dependent on commodities; there are some emerging markets which are heavily dependent on exports. India is also an emerging market, but neither export is a big part of India, nor are we dependent on any commodity. In fact, we are reverse-geared to oil as a commodity, and as an emerging economy, we are reasonably inward-looking. So now when you talk to foreign investors, which I do a lot of, people who invest into India sitting out of London, Hong Kong and New York, they definitely have some sense of what these correlations are, and what are the drivers of each of these markets. So, I think that we have a lot to learn from some of these international practices. The least that an Indian investor can do is to keep in mind that what are the circumstances in which India does badly, and then prepare for those circumstances by having certain assets which will do well when India doesn’t do well.
Now, Ashish, I heard you mentioned that you have this NASDAQ Fund. Can you just tell us a bit about this fund? I mean, how has the response been from Indian investors; have they lapped it up meaningfully over the last few years, or has it picked up in the last one year? How is it been?
Aashish: So we did that in somewhere in March 2012 when it was launched. I think the first three-four years the challenge was more on the execution front. I won’t say that investors were not looking at it, but I think that because we did an ETF, and ETFs have issues related to liquidity and illiquidity premiums and volumes in the exchanges. Plus, of course, not all mutual fund investors go about opening demat accounts or transacting with stockbrokers. So from that perspective, in the initial three-four years, we had certain acceptance or acceptability related issues, but I think it was a concept which was appreciated. Finally, what we did 18 months back was to overcome this whole ETF challenge. We created a fund which would actually enable people to buy the underlying index. From there on, I think that fund, if I’m not wrong, is now over 500-crore size. Clearly 500 crore by Indian standards is not a big number really. I can say specifically in the last 18 months, there has been increasing acceptance. And I think that if you see NASDAQ 100 is very popular index. It’s about 47 percent technology and aged kind of corporations which are listed on the NASDAQ index. So very high acceptance and I think performance has been quite stellar since inception.
Now, let’s talk about the NFO that you have coming in and I also have an adviser, Tarun Birani. He will be talking about his thoughts to give our viewers both sides of the new fund offer?
Aashish: Just like we had the NASDAQ 100, which we did in 2012 and like I said, NASDAQ is a tech-heavy index. In fact, it doesn’t have financials. So from that perspective, I think S&P 500 is more, I wouldn’t say old world, but I would say a typical broad-based large-cap index. So two differences- one, I already pointed out that NASDAQ 100 is tech-heavy and the other is, of course, NASDAQ 100 has a cross market cap kind of listings, whereas the S&P 500 is a 65-year old index. I would put it this way that if you landed up in the Indian equity market, and you had no clue where to start, then a good samaritan would kind of tell you, okay go to the BSE and you start with the A group, that’s where you would start. Instead of India, if you kind of landed from Mars, you landed up on Earth, and you had no clue where to start with equity as an asset class, then I also the world’s A group, or the world’s large-cap index is actually S&P 500 because it has the largest companies in the world. I mean in those 500 odd companies, the smallest companies about just under $2 billion in terms of market cap and the largest ones are well over a trillion in terms of market cap. So, there’s no active management out here. It’s just an access product. I mean, what we are doing whenever we do this, NASDAQ, S&P 500, etc, it’s a very different practice from the other side of our business, which is to do active management in Indian equities. This is where we don’t take any active calls. We feel seriously that asset allocation, and simplification of investment is something that we should run after. That’s why we do I would call it more than access product, we are just enabling you to buy the S&P 500 index because ultimately, it’s not possible for you sitting here to put Rs 500 or Rs 1,000 or Rs 2,000 or Rs 10,000, whatever the amount may be, it’s not possible for you to put that money into U.S. So what we are doing is just building a pipe. We are pulling money out here. It’s a SEBI-registered mutual fund scheme. We are pulling money out here and just converting the rupee into dollars and just buying the S&P 500 index in its entirety. I think apart from this low correlation, diversification bit, I think Niraj, you were highlighting year-on-year performance numbers, and I think what is interesting to keep in mind is that while you’re buying S&P 500 Index, which is a diversified index across 11 sectors, what you’re also doing is you’re actually buying U.S. dollar as a currency. And in the last 20 years, INR has depreciated annualised 2.5 percent year-on-year over against the U.S. dollar. In the last 10 years, INR has depreciated 4.5 percent year on year approximately versus U.S. dollar. So apart from, you know, there could be a bad year in India and it’s good that you are invested in the U.S. market, that apart, if you have invested and the rupee depreciates that adds to the return. So it’s not just about asset and geography diversification, it’s also currency which matters a lot.
Tarun, have you had a chance to study this new fund offer?
Tarun: Yes, I went through this product. I will just quickly point out what are the challenges right now from a financial planning point of view for an Indian investor.
What are the pluses and minuses of this NFO?
Tarun: So, from a plus point of view, you’re getting exposure to the top 500 companies globally which is not available for an Indian investor as we speak today. Investors like Warren Buffet has always spoken about this particular S&P 500 index that if you want to put your money and forget, I think this would be one index fund, you should put your money because this index fund has 40 percent of its sale outside India, it’s in a true sense a very global fund. So, if you ask me, anybody who is looking at putting his exposure outside India, this would be my first choice to look at it.
How taxation might be different for this product versus others? Is that something that people should keep in mind?
Tarun: So not really, because for debt taxation from a three-years perspective, you get the indexation benefit. So this fund will be rated more like a debt fund. Debt funds over a three-year period gets the indexation benefit and post that the taxation becomes minimised, and which is closer to the equity taxation now, so I don’t think taxation is any way a hindrance to enter into this investment.
Ashish, you want to come in on the other final points as well because you spoke about the dollar exposure that person gets via this fund or any other fund, but since we’re talking about the NFO first, let’s just finish that, and then we’ll get to the other pieces. But also, somebody sent me a message about how the correlation of this S&P 500 index fund is very low to the Indian equity markets. In that sense, you actually get a bit of a diversification in the truest sense when India will do well not necessary that this fund may or may not do well but when India is not doing that you might have another fund or another investment, which is actually doing well too.
Aashish: Yes, I think that’s the most important part you know in relation to what Tarun mentioned and also the message that you quoted from. Look when you are investing, there are two things which should never happen. So, for example, most of us are invested in Indian equities, and then we have another investment, which we say that okay, we are doing it for diversification, but then it turns out that that asset is absolutely correlated to Indian equity, then there is no diversification which is going to work out for you. It won’t work. Second is that if you have something which is exactly the opposite correlation, I mean, inversely related. Now, inversely related is also not going to work for you because it is, if one asset gives a positive return plus one, the other guy gives a negative return minus one, it cancels out each other and your return is zero. So, you don’t want something which is plus one correlation. You don’t want something which is minus one correlation. So, you definitely want something like this, which is close to zero correlation, which means that they are not going to move in tandem. So, that is what actually results in diversification. So, low correlation is extremely important for diversification. That’s the first point. Second point is like we mentioned for a lot of us, at least some goals in our lifetime are definitely going to be linked to the U.S. dollar. Whether it is child’s education, whether it is certain asset purchases, whether it is international holidays- there are so many things which our country imports where there is a natural cost inflation because if our rupee depreciates. So, there are so many reasons why some of your goals or some of your planning must be in dollar terms. Even right now, just see what is happening. I mean the turmoil started in the Western world. There is global selling, but the U.S. dollar appreciates. Why? Because there is a flight to safety. So, everybody buys U.S. treasury and U.S. dollar. So, that is something to keep in mind. And the third thing is that even if you are banking on the growth in emerging markets, you shouldn’t miss one thing which Tarun highlighted in the beginning that 60 to 65 percent of the sales of these companies is in U.S, but 40 percent of sales of these companies is actually global. So look, if you want to invest in Microsoft, for example, and Microsoft we all use their systems. Unfortunately, Bloomberg is a private company, so I can’t quote that. But most of these large companies that we are using the products, even if you take Pfizer as a pharma company, you take Microsoft, you take the Amazon and the Starbucks and the McDonald’s of the world. They are listed in the U.S., and they are part of S&P 500 Index. So there’s no way for an Indian to buy stock of Coke, right? I mean, you have no choice. You have to invest in the U.S.. So it’s also a question of market access, which is what I was alluding to.
One final question, Aashish to you, and this is relating to whether the tracking error or the taxation is different for this fund versus funds available for somebody for international diversification? You think all of these funds would have debt taxation as a given?
Aashish: See, it is a very logical thing. In India, till two years back investing on equity had zero capital gains tax. Since last two years, we have a tax of 10 percent but you would agree it is still a concessional rate of tax. So it’s very logical and very common sensical that the Indian government or the Indian tax dispensation, will give you a discount on your tax because you’re investing in Indian equities. I mean, why should the Indian dispensation give you a discount on your tax if you want to buy U.S. equities right? So, they’re allowing you to do it but I don’t think they should be giving you tax concessions for buying U.S. equity. I think that’s perfectly logical. There’s no reason to give you that tax benefit. But I don’t think that when you’re talking about diversification, I don’t think that tax should be a consideration at all. In fact, Tarun explained to you why the calculation doesn’t seem to be onerous. So he’s right in making that calculation and he’s right, that doesn’t have a big impact. But I would go one step further and say that it would be foolhardy to even think of tax when you’re thinking of diversification. There are so many years which you quoted in your table, there are certain years when U.S. equity has a positive return, Indian equity has a negative return. So what tax are we actually going to calculate? Look, tax is a happy incidence; you have tax when you have a return. So if your starting point is going to be that I will not diversify, because I have to pay tax means you’re not going to get that return in the first place and you’re not going to have that diversification in the first place. So I really don’t think that when you are thinking of buying uncorrelated assets, there is a purpose behind buying uncorrelated assets and tax just can’t be the starting point for it. As far as tracking error is concerned, clearly, it is our headache to ensure that we don’t deviate significantly from the index. So that is clearly, there is no other performance measurements in an index fund other than to hold us accountable for faithfully mimicking the index itself.
So, Tarun you were getting into the point of the challenges that an Indian investor faces when he looks at diversification. You want to elaborate on that?
Tarun: Yes, I think many of the points have been already covered by Aashish, but at the sake of repetition, I will just give a broader perspective because when I deal with lot of Indian investors or clients, I have always observed that we are too much into India, everything is related with India. So, anything happens here, the direct impact is on your portfolio. If I give you a quick math, in 2019, the Indian market has delivered say 3-4 percent kind of returns. In the same year, U.S. markets have delivered 35 percent of the return. Russia has delivered 44 percent of the return. Like this, the leadership is changing every year. Every year, there is a leadership change which is happening. So, the point on diversification and low correlation is very relevant and as I speak on an equity thing also, why should I buy a Maruti versus why shouldn’t I buy a Suzuki? Suzuki makes all the royalty income from Maruti as well as they have a portfolio across the globe. So, if I as an investor, am getting into a global piece why not? So, that is one very strong case why I should look at global investing. Second, from a financial planning point of view also there are a lot of requirements which we have observed. Most of the clients require it for their children’s future, we all are travelling, I think at this point of time talking about travelling is a little challenging, but we require dollars all the time. We live in a global environment. So, we can’t deny that tomorrow we may require funds anywhere. So, it is important to have some asset base outside India, but from a principle point of view, my suggestion would be not to go overboard more than 15-20 percent of your overall asset allocation into this asset class- global investing. That would be my suggestion. Apart from that, rupee depreciation, again what Aashish has made a point, I have done this research around for 20-25 years and it is clearly a pattern that there is a 4-5 percent rupee depreciation which is happening since 1990. Every year you are seeing a rupee depreciation happening; more or less the average of 4-5 percent is happening. So, this is again an opportunity for Indian investor to benefit from this depreciation. So, that also could be looked at. Yes, as we speak today, we are at a Rs 76 to a dollar today. It is quite possible there could be volatility but from a long-term point of view, if you’re looking from a 5-10 year time kind of time frame, I clearly see that rupee depreciation pattern will continue because there is an inflation differential between both the countries. So I don’t see any reason why this, this pattern will change in future . So that is again an added thing. Also the point of opportunity is absent in India. So, we don’t have opportunity like the tech companies the likes of Microsoft, Google Facebook. You don’t have e-commerce companies like Amazon, Flipkart, the ride-sharing companies consumer durables like Samsung, LG Daikon. Smartphone companies like Apple, Xiomi, Samsung. Pharma companies like Pfizer, Johnson & Johnson. So, all these diversification is available to us. So why should I limit myself only to India? Yes, it is very important to invest in something what you understand and from that understanding point of view also, I feel that this makes a very strong case because this index, if I look at this index has a 65-year track record, and it is one of the biggest index globally, and it invests in the newest of the blue-chip companies globally. So, I don’t see any reason why it should not be part of my portfolio.
Now Tarun coming on the things that people should keep in mind. There are other options that are available in the market too. This NFO is one thing. Motilal Oswal also has that NASDAQ NFFO and we’ll get to that as well. But there are a bunch of others. ICICI Prudential Global Advantage Fund is a fund of fund, I think Parag Parikh has a long-term equity fund wherein they invest 35 percent, Franklin India Feeder U.S. Opportunities Fund, DSP has a few products. Have you tried to look at some of these available products and which ones are better to invest in, which ones may not be as great? Any thoughts?
Tarun: So, before I go into specific funds, there is one more important case one we need to understand that as an Indian investor, I have an option to invest 2.5 lakh dollars under the liberalised remittance scheme — LRS also. So, I can easily open a broking account and I can invest in dollars myself. But from a retail investor point of view, I think it’s a very challenging thing. But for the savvy investor that as an option is also available. So I would also recommend that anybody who can invest directly and use that LRS scheme, he can buy this S&P 500 globally also and that is available. The Vanguard S&P 500 ETF is available at a three-basis-point cost versus the Indian product will be at 50-basis-point cost. So that also should be one thing, which savvy and smart investor can look at. They can start looking at investing directly in U.S. dollars also. Talking about the Indian diaspora, I think yes, these are very simple products. So, I would strongly recommend to go for more simple products. So, in that simplicity thing, we have funds like, index funds, like Nasdaq fund available from Motilal, but there are a lot of active good names available in the market like there is a Franklin Feeder Fund which has almost a six-year track record in India. Again, it feeds into the global fund, which is again one of the top-performing schemes in the large-cap category. Apart from that we have funds from DSP, ICICI. So yes, a lot of products available in the market. But if you ask me how the S&P 500 stands out, that’s because it’s an index fund, it’s again a very low-cost product. As we speak today, it is available at 17-18 percent discount to the year-to-date peak level. So, that is again an attractive level for anybody who want to invest for a long point of time. So, apart from that, there are a lot of products which are available, like ICICI has a product which is dynamic enough to invest across the globe. So it will keep looking at opportunities dynamically, let’s say U.S. is looking good, they can look at U.S., Europe is looking good, they can invest some piece in Europe. So they can keep moving the location across the globe. So, that as a strategy also could be looked at because the leadership is changing every year. So, one may look at that that kind of a dynamic product also.
If the rupee depreciates, it’s a positive for the person who has invested in these funds. Right?
Tarun: Right. Rupee depreciation is a positive thing because that that comes incremental to the overall fund returns.
Is there a product within the available funds in India, which is maybe not as good because I heard you say that this S&P 500 index fund or the NFO is arguably the best one available? Are there some or is there some product which is not as good?
Tarun: So I would not like products with very high expense ratios. So there are there are a lot of global funds for the sake of global investing, but they are available at 2.5 expense ratio. So without naming them, but I would recommend investors to look at expense ratio very clearly before investing in any of these products and investing in ETFs makes much more sense.