‘We are overweight on domestic themes'

The Fund of Funds concept has not picked up in India, primarily because the investor was not gaining significantly from our churning of the underlying assets, said Mr Arvind Bansal, VP and Head, Multi Manager Investments, ING Investment Management India, in an interview to Business Line.

Excerpts from the interview:

Why has the Fund of Funds concept not taken off in Indian markets?

There are a few issues; one is the commission. When a relationship manager changed the underlying schemes he was getting upfront commission till 2009.

The problem is that in a Fund of Funds, if I change the underlying schemes, the relationship manager will not get any commission. Because of that(new regulations) there will be a revenue loss for the relationship managers.

The second point is that many Funds of Funds were focusing primarily on equity schemes.

From 2007, people were looking for returns as well as reducing the risk. In a Fund of Funds, manager risk is taken care of because you hold a diversified portfolio.

Third, Fund of Funds debt attracts higher taxation than equity and this could be a disadvantage. Even though people like a Fund of Funds, they feel there is a higher taxation and that would result in lower returns.

For all these reasons Funds of Funds have never taken off. However, people are now looking for asset allocation, and Fund of Funds such as our Financial Planning Fund. And, of late, there has been an improvement in Fund of Funds collection.

Why have your international funds failed to deliver despite rupee depreciation?

If you look at the fund choices, we have Global Real Estate, Latin America and Global Commodities. DSP has a few commodities-related funds.

Almost everything is high beta. As a result of this, fortunately or unfortunately, most of the products available from India are highly correlated with the India asset class because the underlying demand is coming from emerging markets such as India.

And as a result of this, if India does well these products will do well but if India does badly, these products will suffer.

If that is the case, are international funds not sufficiently diversified?

You can't generalise because international funds were part of a wide space. Till now in India very few offerings are available. In the last one year international funds have done better than India primarily because our markets underperformed.

Besides that, the rupee depreciation helped these funds. The performance of international funds is based on the asset class in which they invest and whether they have correlation with India.

For example, in 2009 international funds invested in global convertible bonds and they delivered returns similar to Indian equities.

From an Indian investors perspective he will think he has done well by getting 100 per cent. If a global investor, by investing in global bonds, achieves the return of Indian equity, why will he put money in Indian equity? But those products are not available in India.

I will give another example; across the globe, interest rates are being cut.

As a result of this, global fixed income funds benefited from the falling interest internationally. US Treasury or German Bonds in the past 2-3 months have given 5-6 per cent return in US dollar terms and you have 12-13 per cent appreciation on account of rupee depreciation; technically funds invested in these securities have given returns of 17-18 per cent.

The problem in India is that they compare international funds with equity returns. This is not the right comparison.

What reason do you attribute to the poor performance of your Global Real Estate Fund?

Globally, real estate funds normally give 8-10 per cent return. Now the challenge is that in India we compare their performance with fixed income products.

They expect 3-4 per cent from rental yield and rest from the capital appreciation and this is the nature of the fund.

With a lot of negative news flow, which are the sectors you prefer over two-three years?

We focus on domestic consumption. There are many sectors and sub-sectors. For example pharma.

We consider the domestic consumption story for the primary reason that they are relatively insulated from the world markets. The leverage of some of these companies is less.

With rising interest rates these companies will be affected to a lesser extent. We have been maintaining the same portfolio for the last 2-3 years.

We give our money to a few managers. Most of the large managers are sector-agnostic. In our Fund of Funds we have given 20 per cent to IDFC Premier and recently we have included SBI Emerging Fund.

Because the portfolio is focussed on domestic consumption, we have also bought into DSP Micro Cap. This will give access to small-cap stocks .

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