The Hindu Business Line : International theme funds

The need to diversify into other global equities has never been as compulsive as it appears now. The market correction in May 2006, followed by short periods of turbulence in 2007 and the prolonged volatility in 2008, may have triggered the necessity for such products in India.

Templeton India Equity Income was the only international fund to be launched in 2006; a host of other funds joined this ‘international investing’ theme in 2007 and 2008. While it may be too short a period to assess the performance of these funds that seek to provide the best of both domestic and international investing, here is a look at how they have fared, especially in the difficult months of 2008. It has been compared with domestic indices to assess if diversifying into global stocks has worked well.

There are at present about 10 funds with a track record of at least three months in the international investing category. Most of these funds have, however, restricted their investment to about 35 per cent in international stocks and the rest in Indian equities.

This restriction appears to be a fallout of the domestic mandate that requires funds to invest at least 65 per cent in Indian equities in order to be classified as an equity-oriented fund. More recent funds from the Birla, HSBC and Franklin Templeton stables have chosen to hold higher assets in foreign equities as part of their objective.

Despite the above limitation, almost all the funds with a six-month track record have declined less than the Sensex return of -11 per cent and have also outperformed the category average of -12 per cent witnessed by domestic diversified mutual funds.

Birla Sunlife International Equity Plan A, with the flexibility to invest fully in global equities, was the only fund that did not slip into negative territory during the above period. The fund, however, holds higher positions in cash and debt instrument than its peers.

That international funds could not gain from the short momentary domestic rallies in recent months is reflected in their less impressive performance over the last three months.

Barring relatively new funds such as DSPML Natural Resources and New Energy and Tata Growing Economies Infrastructure, and the more established Templeton India Equity Income, all other funds in this category have declined more than the Sensex and the S&P CNX 500.

The year-to-date performance of these funds, although superior to the domestic funds’ category average, also remained less impressive. ABN Amro China-India fund was among the worst performer between January-August 2008. Its strategy to focus on India and China, the two worst performing markets, pulled down the fund’s performance.

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