Should you invest abroad?

India, it is believed, is an economy which has phenomenal potential and one of the major economies which can grow over 5%, in real terms for decades. We had all believed that Indian economy has structurally shifted to a much higher plane, in terms of GDP growth at 8.5-9%, a few years back. Some of the worthies even started talking about double digit growth. In hindsight, it had just been wishful thinking, without substance for we never put in place the infrastructure or the enabling environment for such high growth to take root.

The dream lies in tatters. All in the BRIC grouping are in doldrums, with only China in a reasonably good shape.  We thought that since we are a developing economy ( by many indicators we are actually under developed ) and since the population is young, there will be lots of growth here. By corollary, we expected the “developing” economies like ours to offer much higher returns on our investment, due to the explosive growth rate.

Again, this remains on paper. When the global meltdown happened, our market, along with other emerging economies tumbled much more than the US markets! This happened, inspite of the fact that it was the epicentre of the crisis itself!

Now, what about the returns since… The annualised returns that Sensex has offered is a 5% & 4.5% for three and five year periods. Nasdaq has given returns of 16.8% & 7% respectively, for the same time periods. It is instructive to look at the performance of various markets. Emerging markets as a group have done worse than the US & UK markets, in terms of annualised returns.  Malaysia was an exception. Please refer to the table.

Name	Type	As of Date	1-Year	3-Year	5-Year
Morningstar Stock Indexes
Broad Market
US Market	TR	41461	28.25	18.87	6.5
Name	Type	As of Date	1-Year	3-Year	5-Year
Other Domestic Stock Indexes
DJ Industrial Average TR	TR	41461	25.69	18.97	7.54
NASDAQ Composite PR	PR	41461	22.54	16.86	6.99
NYSE Composite PR	---	41461	24.41	12.83	0.44
Russell 2000 TR	TR	41461	31.79	18.49	7.46
S&P 500 TR	TR	41461	27.82	18.61	6.19
S&P MidCap 400	TR	41461	30.66	19.61	7.88
Foreign Indexes
DJ Malaysia PR USD	TR	41461	17.49	15.49	8.49
Euronext BEL 20 PR EUR	PR	41461	24.64	2.84	-6.51
Euronext Paris CAC 40 NR EUR	TR	41461	29.81	7.45	-0.99
Euronext Paris CAC 40 PR EUR	PR	41461	26.1	4.29	-4.18
FSE DAX PR EUR	PR	41461	29.94	8.01	0.3
FSE DAX TR EUR	TR	41461	34.35	11.81	3.94
FTSE 100 TR GBP	TR	41461	21.93	11.99	5.52
FTSE 250 PR GBP	PR	41461	30.34	13.9	7.33
Hang Seng Hong Kong Composite PR HKD	TR	41553	17.56	3.15	-2
Hang Seng HSI PR HKD	PR	41553	17.11	3.34	-1.51
Nikkei 225 Average PR JPY	PR	41553	59.76	12.3	-0.73
S&P BSE SENSEX India INR	PR	41461	16.7	5.01	4.53
S&P/TSX Composite PR	PR	41461	6.74	2.46	-3.74
Shanghai SE Composite PR CNY	PR	41461	-3.59	-4.16	-7.86

 What should Indian investors do?

When we invest, we will definitely have a home country bias.  This is a universal phenomenon. However, we have clear proof that inspite of poor GDP numbers, the US & UK stock markets have given far better returns than most emerging markets. It will indeed be prudent to invest a portion of one’s assets in such markets.  While we can debate the quantum of investments in markets abroad, upto a 20% allocation seems fair.

How to invest?

Participating in these markets is best done through mutual funds, as a normal investor or even their advisor may know nothing about those markets or the companies there. Now, choosing correct schemes to invest is also a massive exercise in itself as there are thousands of schemes out there. Also, the entry load in most of these schemes is high at 4%or more, for retail investors.

The workaround is to participate in Indian MF schemes, investing abroad. Again, even here, those managing the investments from India would either have access to research from abroad or have a feeder fund which invests in a fund abroad. A feeder fund is preferred as the main fund ( which receives the investment ) would be an existing performing fund, managed by fund managers sitting in those markets and managing the investments. Also, since these Indian schemes collect and invest as an institution, the entry/ marketing charges are normally not there. This benefits the Indian investor, though he may pay another 0.5-0.75% more for a feeder fund, as compared to a normal indian equity MF scheme.

What kind of funds could one invest in?

The funds that invest into broad index or are diversified would be the ones to look out for. Since markets abroad are far more efficient, index funds may be a better bet as outperformance could be very difficult for managed funds. Apart from index funds, once can look for specific funds that invest in different themes like real assets ( as opposed to financial or IP assets ) like L&T Global real assets fund, real estate like ING Global Real Estate Fund, Index oriented like MOST Nasdaq 100 etc.  One can look at broad emerging market funds too, which invest across the globe.

There is one more major advantage to investing in these global funds. Companies which form a part of these global funds have global foot print and hence anyway participate in the growth happening worldwide. That way, though these are US or UK head quartered companies, they are truly global.   

There is a word of caution. The investments are subject to currency movements and that can affect returns. Need to keep that in mind while investing.

We need to change & emerge out of our reverie. There  are other markets which are performing better and we should have an open mind to diversify our investments there.  No point in adopting an ostrich approach, thinking Indian markets can beat all other markets. We know better now!

Published in Business standard on 12/6/2013; Author - Suresh Sadagopan ; www.ladder7.co.in