Portfolio

‘There is no one country/market that does well all the time’

Anand Kalyanaraman | Updated on January 15, 2018 Published on November 06, 2016

PPFAS Mutual Fund is among the few India-based equity funds that actively invest in overseas stocks — nearly a quarter of the portfolio of Parag Parikh Long Term Value Fund is in international equity. Rajeev Thakkar, Chief Investment Officer and Director, explains why.

What is the rationale of a fund investing a good portion of its portfolio in foreign stocks at a time when foreign investors are flocking to India?

There is no one country/market which does well all the time. In the last 20 years, the US market has outperformed the Indian market over some years while the Indian market has done better in others.

In any case, most large-caps in India have very significant global exposure. Our IT and pharma companies have exports dependent on overseas markets. Corporates like Tata Motors (Jaguar Land Rover) and Hindalco (Novelis) have made acquisitions abroad and a lot of their income comes from overseas markets and Indian commodity related companies are dependent on global prices for their profitability.

Investing a portion of the portfolio abroad gives additional opportunities and reduces country-specific risk and volatility.

Some Indian stocks trade at higher valuations than their foreign counterparts, but this seems to be thanks to superior growth and profitability of the former. Your thoughts.

It is true that a lot of companies are growing faster in India. However, many of the global companies also have high growth. For example, Alphabet Inc (Google) grows at about 20 per cent a year in dollar terms.

Also, many global companies have large emerging markets presence which gives them growth. Further, in many cases, more value is captured at the holding company level in terms of royalty/technology fees/transfer charges rather than at the subsidiary-company level. For example, companies like Maruti, Nestle, 3M, make these kinds of payments to their parents.

Investing in holding companies abroad, say, Unilever or Nestle, could expose the portfolio to risks of several countries. Wouldn't it be prudent to stick to stocks of individual countries?

Just as in stocks, having, say, 10 stocks is considered less risky as compared to owning a single stock, having business operations diversified across countries is less risky than operating in one country.

You have given an example of Nestle. Nestle in India faced a ban on Maggi whereas its operations in other countries were not affected.

One could argue that Nestle India would be facing more risk than a diversified Nestle SA.

What about the risk of adverse foreign exchange movements impacting the portfolio value? How does an investor in foreign stocks guard against this? Some say that investing in foreign stocks is essentially a currency play.

There are two approaches that one could take. If one has a foreign expense foreseen (say, child's education) or one wants assets in other currencies, one should keep the overseas assets unhedged.

If one is looking at rupee returns, it may be better to hedge the currency risk. Hedging the currency risk using currency futures not only reduces the volatility on account of currency but also gives additional returns (currently 5-6 per cent) on account of forward premium.

If one keeps the exposure unhedged, it is a currency play but if one hedges the currency risk, all that matters is the performance of the stocks.

We choose to hedge about 90 per cent of our currency exposure.

How have the foreign stocks in the fund's portfolio performed vis-a-vis the Indian stocks in the portfolio?

Our fund launched in May of 2013. From launch till Indian general elections, overseas stocks did well. Later, from April 2014 for about 15 months or so Indian stocks did very well and the overseas portfolio lagged.

Later in the third phase again, the overseas portfolio did better.

We are satisfied with the returns on both segments, especially since there is an appreciable reduction in portfolio volatility and different markets do well at different points in time.

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