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In Part 1 of our search for international funds, we started at 50,000 feet by looking at ALL the international mutual funds in India. TLDR, there are 41 mutual funds. Of these, only 3 are passive.
We believe investing passively should form the bulk of international exposure for most investors.
For investors seeking active exposure, we then shortlisted from the 38 active mutual funds based on historical returns, consistency, style.
We ended with these 7 funds on our shortlist:
- PGIM India Global Equity Opportunities Fund
- Edelweiss Greater China Equity Offshore
- Franklin India Feeder – Franklin US Opportunities Fund
- Nippon India US Equity Opportunities Fund
- ICICI Prudential US Bluechip Equity Fund
- DSP US Flexible Equity Fund
- Franklin Asian Equity Fund
Table below summarises key information about the shortlisted international funds
click to enlarge
Past returns take us up to a point. To now bring this list of 7 funds down to 1 or 2 we took a longer look at what’s under the hood.
We’ve ordered the funds from least to most favourable within our funds shortlist.
#7 Franklin Asian Equity Fund
Who offers this fund: Franklin Templeton India
Is this a Fund of Fund? No
Geography: Asia ex-Japan
Sector: Agnostic
Investment Mandate:
This fund invests in Asian companies or sectors (excluding Japan) which have a long term growth potential across market capitalization. It gives investors access to a portfolio of quality companies in the Asian region that are well positioned to take advantage of the long term growth potential
What we like about the Franklin Asian Equity Fund
Allows exposure to Asia, particularly companies in China and Korea. Table shows their top 10 holdings as of Jan 2021.
Source: morningstar
Beats its benchmark. But that benchmark has not exactly set the world on fire. That said, the fund has done significantly better over the last two years.
What we don’t
It holds over 10% in Indian companies. This is no fault of the fund because an Asia ex-Japan fund will inevitably hold Indian companies. But for the Indian investor looking to diversify globally, this only means paying the slightly higher management fee of an international fund to hold HDFC Bank, ICICI Bank, L&T and similar, which already exist in every other domestic fund she already holds.
Offers the least volatility-adjusted return premium over the NIFTY when considered over a five year time frame.
#6 DSP US Flexible Equity Fund
Who offers this fund: DSP Mutual Fund
Is this a Fund of Fund? Yes
Underlying fund it invests in: BlackRock Global Funds – US Flexible Equity Fund
Geography: US
Sector: Agnostic
Investment Mandate of underlying fund:
The US Flexible Equity Fund seeks to maximise total return. The Fund invests at least 70% of its total assets in the equity securities of companies domiciled in, or exercising the predominant part of their economic activity in, the US. The Fund normally invests in securities that, in the opinion of the Investment Adviser, exhibit either growth or value investment characteristics, placing an emphasis as the market outlook warrants. [Source: Fund Website]
What we like about the DSP US Flexible Equity Fund
Sector exposures differ from the index. Chart shows the exposure of the fund versus the benchmark as of Jan 2021.
Source: Fund Website
Let’s be honest, the fund managers aren’t exactly at risk of being called mavericks for their unconventional choices. But the lower allocation to technology given the current environment, whether right or wrong, counts for some mild appreciation.
What we don’t
Has not beaten its benchmark, the Russell 1000.
Source: Fund Website
The Blackrock US Flexible Equity Fund has been around for almost two decades. And it has underperformed its benchmark over the entire duration.
#5 Franklin India Feeder – Franklin US Opportunities Fund
Who offers this fund: Franklin Templeton India
Is this a Fund of Fund? Yes
Underlying fund it invests in: Franklin US Opportunities Fund
Geography: US
Sector: Agnostic
Mandate of underlying fund:
The Fund aims to achieve capital appreciation by investing principally in equity securities of US companies believed to possess sustainable growth characteristics and which meet growth, quality and valuation criteria. These include small, medium, and large capitalisation companies with strong growth potential across a wide range of sectors that have exceptional growth potential and fast growing, innovative companies within these sectors. [Source: Fund Website]
What we like about the Franklin US Opportunities Fund
Tenure. This fund has been around since 2000, which makes it the grizzled veteran on our shortlist. Surviving as an active fund over two decades by itself is not a badge of honour, but suggests they’ve done something right to still be around.
Chart shows a comparison of the fund’s characteristics versus its benchmark, the Russell 3000. The black line is the index average, the dark blue circle is the current portfolio and the shaded region is how the range in which it has moved in the last five years.
Source: morningstar
The fund has typically bought higher growth, lower yield stocks than the index while maintaining quality and at comparable or lower volatility.
What we don’t
Has not beaten its benchmark.
Source: Fund Website
The downside of having a track record is it’s open to inspection versus the passive benchmark. Doesn’t matter what period you consider, the fund has failed to beat its benchmark Russell 3000 Index. Another reason why we feel a passive fund should constitute the bulk of international exposure for most investors.
#4 ICICI Prudential US Bluechip Equity Fund
Who offers this fund: ICICI Prudential Mutual Fund
Is this a Fund of Fund? No
Geography: US
Sector: Agnostic
Investment Mandate:
An open ended equity scheme investing predominantly in securities of large cap companies listed in the United States of America.
What we like about the ICICI Prudential US Bluechip Equity Fund
Has beaten its benchmark, the S&P 500 Total Returns Index in five of the 7 years of its existence. The extent of outperformance is not something to write home about but it’s still commendable given how many active funds struggle to match their benchmarks even before costs.
Not a hot sector chaser
Table below shows the top 10 holdings of the ICICI Prudential US Bluechip Equity Fund as of Dec 2020.
Source: morningstar
No FANG stocks on the list. There is even an aircraft manufacturer! Clearly, this fund does not load up on the stocks that almost everyone in the world seems to have been buying in 2020. You could think of this as a weakness or a strength. But considering that it has been beating its benchmark (albeit by not much) since inception, this might be a good thing suggesting the fund managers are likely to stick to their chosen style irrespective of what is fashionable.
#3 Edelweiss Greater China Equity Offshore
Who offers this fund: Edelweiss Mutual Fund
Is this a Fund of Fund? Yes
Underlying fund it invests in: JP Morgan Funds – Greater China Fund
Geography: China, Hong Kong & Taiwan
Sector: Agnostic
Mandate of underlying fund:
To provide long-term capital growth by investing primarily in companies from the People’s Republic of China, Hong Kong and Taiwan (“Greater China”).
Uses a fundamental bottom-up stock selection process. A high conviction approach to finding the best investment ideas. Seeks to identify high quality companies with superior and sustainable growth potential. [Source: Fund website]
What we like about the Edelweiss Greater China Equity Offshore Fund
The only fund available to Indian investors focusing on companies in Greater China. Axis has just launched a Greater China fund in Feb 2021.
Since most Global funds are US-tilted, this fund offers the opportunity to get exposure to the behemoths emerging out of China. Companies like Taiwan Semiconductor, Tencent, Alibaba, Meituan, Ping An Insurance will figure in most Global portfolios as well but will be relatively smaller weights compared to US FANG stocks.
What we don’t
An exorbitant expense structure that applies a 5% initial charge. The AMC has clarified the 5% “Initial Charge” is not applicable to investors in the feeder fund.
Source: JP Morgan Website
The on-going management fee of 1.8% is not as bad as some other funds.
Alpha regressing to the mean. Chart shows its annualized return versus the benchmark and the excess return over the same time period.
This funds recent performance blows the other international funds out of the water. But increase the time horizon and the excess return looks less impressive.
Feast or Famine. Chart shows calendar year returns versus benchmark.
Source: JP Morgan Website
The fund tends to magnify benchmark returns both on the up and downside. That means it can give you a few sleepless nights. But then markets can do that, in general.
#2 Nippon India US Equity Opportunities Fund
Who offers this fund: Nippon India Mutual Fund
Is this a Fund of Fund? No
Geography: US
Sector: Agnostic
Investment Mandate:
The primary investment objective of Nippon India US Equity Opportunities Fund is to provide long term capital appreciation to investors by primarily investing in equity and equity related securities of companies listed on recognized stock exchanges in the US and the secondary objective is to generate consistent returns by investing in debt and money market securities in India.
The investment philosophy would be a blend of top down and bottom up approach without any sector or market capitalization bias.
The fund proposes to follow the Hare Strategy for its investments. The Hare portfolio invests in stocks of firms that are experiencing rapid growth, emphasizing those that possess sustainable competitive advantages.
[Source: Fund Website]
What we like about the Nippon India US Equity Opportunities Fund
Not a fund of fund, so no double-dipping of expenses, which means this is one of the lower-cost active mutual funds available for international exposure.
Has beaten its benchmark. Table shows the fund’s performance versus the S&P500 TR and surprisingly, it has done well relatively. Especially in 2018 where it delivered double-digit excess return by avoiding what was a down year for the index.
What we don’t
Hasn’t been around very long. The fund was launched in mid-2015 so there’s not as much of a track record to go by compared to say the Franklin US Opportunities Fund. So it has not yet dealt with a really tough year for US Markets.
#1 PGIM India Global Equity Opportunities Fund
Who offers this fund: PGIM India Mutual Fund
Is this a Fund of Fund? Yes
Underlying fund it invests in: PGIM Jennison Global Equity Opportunities Fund
Geography: Global. 60%+ in US companies.
Sector: Agnostic
Mandate of underlying fund:
To outperform the MSCI All Country World Index by investing in an unconstrained, concentrated portfolio of companies from around the world believed to be new market leaders with sustainable competitive advantages and strong financial characteristics. The strategy seeks to capture the inflection point in a company’s growth rate driven by disruptive technologies or services, new product cycles and expanding addressable markets. The Portfolio generally holds between 35 and 45 U.S. listed stocks and ADRs, diversified across industries and sectors. [Source: Fund website]
What we like about the PGIM India Global Equity Opportunities Fund
The underlying fund has beaten its benchmark comfortably over its tenure
Returns in USD and do not consider INR conversion
Not hugging the benchmark by buying what’s in the index. Chart shows the funds composition by sector as of Dec 2020 versus the benchmark.
Source: Morningstar
E.g. The fund was significantly overweight consumer cyclical and underweight financial services. This is only a point-in-time snapshot and could change but a willingness to meaningfully deviate from the index is essential for actively managed funds to be able to beat them over the longer term.
What we don’t
Hefty management fee that puts a 3% dent in the global fund’s annualized performance. Indian investors pay a management fee to the Indian feeder fund as well. This means the fund needs to keep beating its benchmark by a distance to justify its take.
Should investors just buy the #1 fund then?
Comparing international funds against each other is tricky. They have different benchmarks and so offer different sets of constraints to the fund managers. So, there is inevitable subjectivity to this exercise.
We’ve tried to summarise our deep-dive visually along four parameters.
Tenure: This is easy, but potentially least indicative of future performance. Note we’ve considered the tenure of the underlying fund in case of fund of funds, even though the feeder fund in India might have been around for a shorter time.
Global Exposure: Since the intent of this exposure is to get exposure to the world, the more of ex-India world companies the fund can potentially add, the better.
Two ways of looking at performance: Versus respective benchmarks, and versus the NIFTY. Since these are active funds, the ability to outperform their chosen benchmark is an indicator of what the fund managers bring to the table in exchange for management fee. But that on its own is not sufficient because benchmarks differ. And their five-year performance versus the NIFTY also needs to be a consideration.
Given these seven came out of the 38 funds we started with, there’s a case to be made for each of them. But yes, this is the relative ranking in terms of the parameters we’ve considered.
Remember our preference for international allocation is still passive funds:
Given the option of investing in General Motors or Tesla, most of us will have a strong inclination toward one over the other. That is the forecaster in us.
So, we’ll break this question of picking international Mutual Funds down into Active and Passive. The forecaster in us can feel more in control by picking the Active fund, and the remaining should ideally go into a low-cost Passive fund. For passive exposure to US Equities, the Motilal Oswal Nasdaq 100 Fund of Funds serves the purpose.
The split of Active : Passive can potentially be 30:70 all the way to 0:100 depending on personal preference i.e. availability and willingness to put in the mental and emotional energy involved in investing actively.[Part 1]
This article is for informational purposes. Any decision to invest in international funds should consider your specific financial goals and risk profile. And just to be clear, all our product review posts are independent and have no commercial relationship of any kind with AMCs or any other organizations. Let us know what you think on twitter or on slack.
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