Returns from funds with foreign focus outstrip India-centric MFs

Vidya Bala | Updated on February 27, 2011


While top mutual funds that invested in Indian stocks delivered less than one per cent return over the last six months, those with a focus on stocks listed overseas (international funds) delivered a 14 per cent return, on an average.

DSP BR World Energy Fund, with a 38 per cent absolute return, and Birla Sun Life Commodity Equities – Global Multi Commodity Plan, with a 28 per cent gain, were two star performers.

International funds, or funds that redirect your money into stocks or funds listed overseas, have topped the mutual fund performance charts over a three- and six-month period.

Playing the commodity theme

The reasons for the better performance of international funds are two-fold: one, a good number of them were theme funds that invested in companies in commodities or energy or in hard assets abroad.

Two, many of them had higher exposure to developed markets such as the US and the UK, which have delivered much better gains riding on economic recovery, than the Indian stocks in the past six months.

The Nasdaq Composite's return of 27 per cent (in rupee terms), the Euro Stoxx 50's return of 19 per cent and FTSE 100's 16 per cent return over the last six months all demonstrate the investor interest in developed market stocks.

Those markets were also more attractively valued vis-à-vis their emerging Asian counterparts. International funds have taken advantage of valuation-arbitrage in these markets by investing in many bluechip stocks in these regions.

DSPBR World Energy Fund, for instance, had invested 71 per cent of its assets in North America and 19 per cent in Europe as of January.

Similarly, funds that had a mandate of investing in stocks playing on oil and gas, precious metals/mining companies and agriculture-inputs such as fertilisers and chemicals, all stole the show, thanks to the rallying price of commodities world wide.

Birla Sun Life Commodity Equities Fund – Global Agri Plan, which invested in a good number of chemical and fertiliser stocks abroad, as well as Fidelity Global Real Assets, with exposure to hard assets, are schemes that took advantage of the high inflation scenario arising from the commodity rally.

Incidentally, most of these funds placed their bets in stocks in developed markets such as Canada, the US and parts of Europe and had less exposure to emerging markets. In contrast, funds which invest primarily in emerging markets or Asia saw muted returns.

Limited choice

Why didn't domestic equity funds take advantage of the commodity boom to earn better returns? The answer lies in the limited choice of stocks in the precious metal, mining, agri-based or real asset categories in India. Policy issues in commodities such as oil and gas also cap the returns on local stocks.

Published on February 26, 2011

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