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After gold, is the U.S theme catching fancy? - Outside View by PersonalFN
After gold, is the U.S theme catching fancy?

"Strike while the iron is hot." Indian mutual fund houses seem to have been following this technique religiously to garner money. In the past, they launched New Fund Offers (NFOs) when markets were near the top. Likewise some sector and thematic funds were launched when major up-move had already run its course. The new variation has been offshore funds. So let's find out what's so hot about them.

Besides Japan, there has been one more theme that has been in vogue; U.S. Rising dollar doesn't only highlight the strengths of U.S. economy, it also does expose weaknesses of other economies as well. Rupee depreciation is a reflection of underlying problems of Indian economy. It has been a cause of concern for those who depend on imports but it's a boon for exporters. Unfortunately, imports of India far exceed its exports in value terms. This has been one of the major problem areas owing to which current account deficit is swelling and thereby inserting pressure on rupee. Well, but one man's loss is another man's gain. India being a net importer is losing advantage with falling rupee, but investors who have invested outside India realise benefits of weakness in rupee. When rupee falls you can buy more of it with same amount of dollars. Before we see how existing offshore mutual funds have performed under falling rupee scenario, let's understand the currency movement and factors affecting the equilibrium.

Currency and Economic Growth go hand in hand
Currency Data as on June 24, 2013
P: Projections as per CSO Data
E: World Bank Estimates
(Source: ACE MF, RBI, PersonalFN Research)

From 9.3% in Financial Year (FY) 2007-08, India's Growth tanked to 5.0% in FY 2012-13. As per latest estimates of the World Bank, Indian economy is likely to grow at 6.1% in the current fiscal. Faltering growth has put tremendous pressure on rupee which is weakening against US dollar incessantly. Threat to external economy arising from weak rupee, low growth projections and possibility of hung parliament situation at Lok Sabha 2014 Elections has made many investors bearish about India for the time being. Dollar carry trade, which involves borrowing in USD at near zero interest rate and investing in risk assets including emerging markets (India being one of them), has been getting uncoiled (as speculation about end of Quantitative Easing (QE) in U.S. has gathered momentum). Indian mutual funds too have seen regular outflows from equity oriented funds. Citing opportunities outside India, Some fund houses have lined up for launching U.S. centric funds... But hold on... before you commit your money to any such fads check out how existing offshore funds have performed.

How Offshore Funds Have Performed?
Scheme Name Asset Focus/ Market Focus 1 Mth 3 Mths 1 Yr 3 Yr 5 Yr Std. Dev. Sharpe NFO Open Date USD at Launch
HSBC Emerging Mkts Fund (G) Emerging Mkt Specific -8.7 -8.0 -1.4 2.7 -2.2 5.21 0.01 28-Jan-08 39.35
PineBridge World Gold Fund (G) Commodity -6.1 -26.2 -37.4 -13.8 -2.6 7.39 -0.16 15-Apr-08 39.88
Mirae Asset Global Commodity Stock (G) Commodity -7.5 -11.1 -9.6 -1.9 - 5.03 -0.08 24-Jun-08 42.78
Birla SL CEF-Global Prec Metal (G) Commodity -6.3 -28.6 -41.6 -18.3 - 7.23 -0.24 15-Sep-08 46.04
Franklin U.S. Opportunities Fund (G) US Centric 1.6 10.6 22.0 - - - - 17-Jan-12 50.71
ICICI Pru US Bluechip Equity Fund (G) US Centric 3.0 12.2 - - - - - 18-Jun-12 55.91
S&P 500   -4.6 1.4 19.7 13.5 3.5 - - - -
S&P BSE 200   -7.2 -1.2 8.0 0.1 5.1 5.26 -0.04 - -
The list of offshore funds is not exhaustive
Data as on June 24, 2014
(Source: ACE MF, PersonalFN Research)

So far, offshore funds have disappointed Indian investors. Fund houses have tried almost all combinations. Some of them were spot on in predicting trends in currency movement while others were right in predicting 'hot spots'; still most of them have failed in maintaining consistency over long run. For example, HSBC Emerging Market Fund was launched in January 2008 (Near the market top in India and in most of other emerging markets). India was a favoured destination of Foreign Institutional Investors (FIIs). Blistering growth, optimistic outlook pegged Indian rupee higher. Have a look at where was the Indian rupee when the fund was launched. Speaking about other emerging markets; one who would go bearish on them that time would have been considered insane, so strong was the theme. Returns generated by the funds focused on emerging markets are disappointing though. And the performance of commodity funds isn't any exciting either; in fact they have got battered! Now it remains to be seen how far US centric funds go, although their performance has been impressive so far.

Falling Bricks
Base: Rupees 100, converted in USD
Data as on June 25, 2014
(Source: ACE MF, PersonalFN Research)

The primary reason why emerging market offshore funds failed to impress is massive underperformance of underlying markets. On June 25, 2007, the rupee was quoting 40.87 against dollar. Now as on June 25, 2013, the rupee has depreciated to 59.68 a nosedive of about 46%. It means, Rs. 100 (USD 2.45) invested as on June 25, 2007 should have generated 46% absolute returns over last 6 years had overseas markets sustained levels seen 6 years back. But they have fallen, so much so that, even such appreciation in dollar couldn't prop them up. The chart above depicts that three pillars of BRIC (Brazil, Russia, India and China) have been badly shaken. Investment of Rs 100 made in Bovespa (Brazil), RTS (Russia) and Shanghai Composite (China) on June 25, 2007 would have reduced to Rs 87, Rs 66 and Rs 50 respectively (after converting into dollars and vice versa) over last 6 years i.e. as on June 25, 2013.

Now that U.S. economy is doing well and pace of monetary stimulus is set to lower; dollar has jumped against a basket of currencies. Investors have been going gung ho on U.S. equities. But...as the saying goes, "once beaten, twice shy", you had better be vigilant this time. Let's dig deeper and find out if there's any merit to the rejuvenated optimism about the U.S.

Would the Growth Falter?
B: Budgeted
(Source: Bureau of Economic Analysis, Federal Reserve, PersonalFN Research)

Charts above depict that although the U.S. GDP growth seems to be recovering to pre-crisis levels; to get there U.S. government has run massive budgetary deficits. It is expected that deficits would sharply come down in coming years. U.S. government has already announced spending cuts. Under such circumstances growth may not sustain. Real indicators of economic health still point at weakness in the economy, even the U.S. Federal Reserve admits these facets. Have a look...


(Source: Bureau of Labor Statistics, PersonalFN Research)

Job Market is yet to recover as visible in the chart given above. Rise in GDP and voluminous deficits have also failed to revive job market. Unemployment rate is still high as compared to that in the pre-crisis levels. This also puts a question mark on the recovery. Does this reflect in stock market movement? Check out...

Is this rally liquidity driven?
Data as on June 24, 2014
(Source: ACE MF, PersonalFN Research)

Well, not really. It appears that markets are not bothered much about vulnerabilities the economy is still exposed to and this may very well turn out to be complacency again. S&P 500 which captures the broader market movement in the U.S. has reached, rather surpassed, its pre-crisis levels. Tug of war may continue between bulls and bears; nonetheless, Some Indian mutual funds are in the bull camp. You might see, Reliance Mutual Fund, PineBridge Mutual Fund and JPMorgan Mutual Fund launching US centric funds going forward. All of them have already filed a draft with the regulator and waiting in the wings.

To sum up, PersonalFN believes that chasing investment fads may excite you but may not do any good to your portfolio. Let your investment portfolio look mundane but ensure that it is an outcome of carefully crafted asset allocation; a must in every financial plan.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.


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