Investment in international funds to accelerate

Given the continued focus on diversification since equity markets’ run-up post-Covid, there has been a strong preference for active asset allocation to manage the risk effectively. In this context, it is interesting to note the growing investor interest in international funds. It is not a surprise then that assets under management (AUM) of funds investing overseas have grown 5x in the last two years.

Some of these reasons are structural, and we believe they could sustain.

Most Indian retail investors have a home bias, so most of their investments are in India. While India has outperformed the broader emerging markets index over the last three years, there could be periods where India could underperform. For example, over the last ten years, in US dollar terms, the S&P 500 has delivered total returns of 242%, among the highest globally, far higher than MSCI India. It is not to suggest that international funds will outperform over the next decade, but a diversified strategy offers investors additional exposure to global markets.

India will continue to offer a multi-generational wealth creation opportunity, but other global markets also provide unique investment opportunities. India’s sectoral mix, while diverse, is seen to be oriented towards domestic consumption (higher weight towards staples, discretionary and private financials) and thus has a relatively lower beta to global growth. However, some investors may want extended exposure to themes like millennial consumption, innovation in healthcare, tourism, technology exports, climate impact, etc, and the opportunities therein may be limited in India’s investible universe. From this perspective, it may also warrant exposure to international or global funds.

Another interesting aspect is a more profound desire to understand and invest in the new-age tech stocks. While listing these stocks is a relatively new phenomenon in Indian markets, it is already an existing feature in markets globally, such as US and China. In India, many new-age tech companies may be in the early habit formation stage, but they have already scaled up substantially in the US or China. The top five companies in the US - Apple, Microsoft, Amazon, Google, and Tesla - are all based on a solid tech backbone. A few of these new-age tech stocks have grown consistently faster than the market in terms of topline and have shown strong execution. Year-to-date correction in their stock prices has also brought valuations to attractive levels. Thus, investors see a lot of merit in adding these stocks to their portfolios. An easy way for a retail investor is to participate in global technology funds or similar vehicles.

ESG (environmental, social and governance) is also emerging as an important factor. While still at a nascent stage in India, ESG investing is already an evolved concept in Europe, the US and Japan. Therefore, investors wanting to incorporate a pure play ESG-based investing strategy would also do well to invest in global ESG funds.

A key factor has been that the average age of the new investor is less than 30 years. Hence, there is certainly more awareness about global trends, such as investing in new-age tech, which may be at an early stage in India but is already seeing exploding growth elsewhere.

Global equity investments should be looked at from a strategic long-term investment perspective. So, when one or some are not doing well, do not lose sight of the overall portfolio. It is impossible for all stocks and funds to do well simultaneously. International funds offer an added layer of diversification.

The allocation to international funds would ideally be a function of the client’s risk profile. Someone with a likely exposure abroad might want the higher allocation to international funds as this could hedge against rupee depreciation. However, we typically suggest that at least 10-20% of a client’s equity assets be invested in international funds over the long term. There are limited options when it comes to one single global fund. Hence it might be better to invest separately in the emerging markets like the US and Europe.

(The author is the chief business officer at WhiteOak Capital Management)