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Mutual Funds

Axis Global Equity Alpha Fund of Fund: Should you invest?

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Axis Mutual Fund has launched an NFO (New Fund Offering) for a Fund of Funds investing globally. The NFO is open from 4th to 18th September 2020. We took a look to see if it makes sense for investors.

Short Answer: Investing globally should be an essential part of an Indian investor’s asset allocation strategy. But the Schroder Global Equity Alpha Fund (the underlying fund this Fund of Funds invests in), has struggled to beat its benchmark over the long term. Investors are better off picking lower cost funds that invest globally, but passively. 


Imagine a perfect world. At least one from an investor’s point of view. In such a world, the universe of companies would not be constrained by lines on a world map. You’d pick the best companies in their respective fields. The lowest cost commodity producers, the best-known brands of finished goods producers, the most innovative monopolistic technology providers. And so on.

An investor in such a perfect world would have a massive advantage over the rest of us. And here’s an international fund that does exactly that. Surely a no-brainer. Or is it?

The Axis Global Equity Alpha Fund of Fund NFO Pitch in a nutshell

To provide long-term capital appreciation by investing in Schroder International Selection Fund Global Equity Alpha, a fund that aims to provide capital growth by investing in equity and equity-related securities of companies worldwide.

Benchmark: MSCI World TR

First, this new fund is different from the usual NFOs we come across in that it is a fund that invests in another fund, hence “fund of funds”. This particular fund will exclusively invest in an international fund called Schroder International Selection Fund Global Equity Alpha Fund.

So, what we do know about this fund? (section in italics is directly from the fund’s strategy document)


Schroder Global Equity Alpha Fund

Investment Objective

Schroders Global Equity Alpha is a concentrated strategy which targets outperformance of 3.0% per annum (gross of fees) versus the benchmark.

Schroders’ Global Equity Alpha strategy is focused on fundamental research, aimed at delivering strong outperformance over the longer term within the context of a risk management framework. We seek to invest in stocks that we expect to deliver forward earnings growth that will exceed the market’s expectations, i.e. stocks with a positive “growth gap”. We focus on only the very best investment ideas that are identified by Schroders’ team of locally based equity analysts and the global and international equities team of Portfolio Managers and Global Sector Specialists (GSS).

Investment Philosophy

Our investment approach seeks to harness the persistent relationship between share price performance and earnings surprise. Using proprietary fundamental and sustainability research, the strategy seeks to invest in stocks that are expected to deliver forward earnings growth ahead of the market’s expectations; in other words, stocks with a positive “growth gap”.

We believe material differences between underlying company fundamentals and market estimates exist due to three persistent inefficiencies:

  1. Markets over reacting to short-term news flow.
  2. Markets extrapolating historic growth and failing to correctly interpret catalysts that change the trajectory of growth.
  3. Markets failing to look far enough ahead when appraising the earnings power of companies.

We believe there is a strong positive relationship between earnings surprise and share price performance. Furthermore, market participants consistently fail to correctly model or value companies delivering persistent long term earnings growth. These observations are demonstrated through time, presenting a persistent source of alpha, if applied systematically. This holds true irrespective of the market environment.

Investment Process

Axis Global Equity Alpha Fund of Fund: Should you invest?

 


So far, so familiar. Like most fundamental funds, it boils down to a process that looks at the universe of stocks, applies a set of quantitative and qualitative filters, and applies company-specific insights to pick its portfolio.

Schroder’s marketing collateral goes to significant trouble to highlight that their Global Equity Alpha fund:

    1. Looks at the entire universe of publicly listed stocks, across almost every market in the world
    2. Applies a significant amount of their considerable global and proprietary expertise to narrow that massive list down to a short list (“40 – 60 of our best international ideas”) with market-beating potential

 

What does such an “ideal” fund own now?

Axis Global Equity Alpha Fund of Fund: Should you invest?

Source: markets.ft.com (14 Sep 2020)

If you are like most people, seeing that slide on screen, especially after that rigorous investment process, you’d nod in approval. 3 out of the 4 famed FANG stocks. Plus another couple of technology names. And Healthcare and Financial Services to show they’re not completely allocated to tech.

The proof of the pudding

What has that impressive looking process and expertise delivered?

Here’s a table from their Strategy Fact Sheet comparing this very active fund’s returns versus its benchmark, the MSCI World Index.

Remember their stated objective is to beat the benchmark by 3% gross of fees.

Axis Global Equity Alpha Fund of Fund: Should you invest?

Source: Schroder Strategy Fact Sheet

It has managed to achieve their stated investment objective once in the last five years.

Axis Global Equity Alpha Fund of Fund: Should you invest?

Source: Schroder Strategy Fact Sheet

Since its inception in 2010, net of fees, has underperformed the MSCI World Index.

This is when you feel the wind go out of the sails of global investment aspirations. All that effort, of applying global and regional expertise, of proprietary models and knowhow that costs time and money. To then be beaten by the passive benchmark.

It’s like if you were cooking a recipe, and applied your creativity and understanding of flavours to first marinade the core ingredient in your special spice mix. Then cook it over a slow flame for 2 hours. And then it turns out your guests actually preferred the same dish cooked in a 10th of the time with a readymade off-the-shelf mix.

In the case of investing, it’s unlikely you’ll be too polite to say that you’ll just have the low-cost passive portfolio thank you very much.

This is not to question the capability of this particular fund. In fact, to highlight the opposite. This fund alone manages $1.7 Billion in assets. So, it’d be fair to assume they are not lacking for the best resources (fund managers, research analysts, execution platforms) that money can buy.

And if they struggle to beat their passive benchmark, what hope do the rest of us have of consistently picking winners? [For a local perspective on active stock picking, read How to think about picking stocks in India]

How to invest globally then?

This does not mean the Indian investor should not look at diversifying globally. Remember the returns you see above are in USD, and look considerably better when converted to INR.

We’ve been proponents of investing globally for a while now: How to think about Asset Allocation in India [part 1 & part 2]

The default for any investor, should be to find the lowest cost method of getting broad exposure to an asset. Those options are getting better over time.

When investing, the default for any investor, should be to find the lowest cost method of getting broad exposure to an asset. Click To Tweet

For now, there are two ways available to most Indian investors to buy a world index of stocks:

The imperfect but low-cost way is to pick the N100 which provides exposure to US stocks, mostly tech but also a few others. Read more in our review of Motilal Oswal S&P500 Index Fund Review

The other, is if you have access to an international brokerage account, as is now offered by many brokerages, to buy Global ETFs like URTH that replicate the MSCI World Index at a low cost. (Note: this is not a recommendation for the specific ETF but as an overall category from which the investor should choose).

Bottomline

Investing globally is an essential component of any investor’s strategy. The Axis Global Equity Alpha Fund of Funds invests in a $1.7B fund that has struggled to beat the benchmark MSCI World Index. Add to that an expense ratio that could be as high as 2.25%, this becomes an expensive way to underperform.

Instead, Indian investors, if through domestic brokerage accounts, should consider lower cost vehicles like the N100 Fund of Funds. If investing through international brokerages, consider low-cost ETFs like URTH offering direct exposure to a truly global equity index.

Most importantly, consider your overall allocation to each asset class (Domestic Equities, International Equities, Debt, Gold and so on), and make sure to stick to that allocation for the long term.


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