Want to own a slice of Apple? Or, you wish to flaunt a mix of Meta and McDonald's in your portfolio? It's not so hard, yet not too easy, either.
With more and more Indians scouting for greener pastures for their wealth, India's overseas direct investment reached $2.14 billion in the first three months of this fiscal. And, this figure is set to rise further, thanks to the options available to high networth and ultra high networth individuals to park their money beyond the Indian shores.
Besides the popular investment options like mutual funds, exchange traded funds (ETFs), equities, listed debt securities, and private equity funds, Indian investors can also invest under the Overseas Direct Investment (ODI) and Overseas Portfolio Investment (OPI) rules and regulations.
But which of these options or combination of options is the best suited? “Most of the returns in an investment portfolio comes from asset allocation and the optimum asset allocation does not remain static over a period of time,” said Devina Mehra, Founder and Chairperson at First Global. "In short, what is needed is a dynamic and tactical asset allocation system."
One has to be nimble and agile to make quick adjustments based on the evolving market environment.
Experts seasoned in managing investments in overseas equity markets advise investors to route their money through ETFs or MFs that invest in global markets, and in instruments that have multi-asset allocations.
Although investors tend to romanticise about owning a stake in global giants, it should be the least preferred route for the risks of investing in individual stocks may be fairly high and to keep track could be harder.
Which ETF to opt for?
The easiest way for any Indian investor looking to invest in international markets is through ETFs. These are passive strategies which provide beta exposure to the geography or theme at a low cost.
“In evaluating ETFs, it’s important to know the tracking error of the ETF versus the underlying index, and the fees,” suggested Sunil Sharma, Chief Investment Strategist at Ambit Global Private Client. Most liquid ETFs should ideally have very low tracking error and a low fee.
“For investors with a conservative return and risk expectation, the S&P 500 is a good benchmark and for investors with a growth mindset, we’d look at ETFs tied to the Nasdaq,” Sharma said.
The S&P 500 represents the large-cap US equities, takes into account the liquidity of stocks and is extremely diversified. IT, healthcare, consumer discretionary and financials are some of the top sectors represented in this index.
“Taking exposure to S&P 500 not only gives exposure to the US economy and markets but also offers significant exposure to international markets since many companies in this index have significant global revenues ranging from 30 percent to as high as 60 percent,” said Vikas V Gupta, CEO and Chief Investment Strategist at OmniScience Capital.
According to Gupta, the most traded and liquid ETF that tracks S&P 500 is SPDR S&P 500 Trust ETF (SPY). The other options are iShares Core S&P 500 ETF (IVV) and Vanguard 500 Index ETF Fund (VOO). All three options have slightly different expense ratios and liquidity. “One can choose from one of these as a core global equities allocation,” he said.
Technology has brought a significant disruption to traditional businesses and the way of life. “To be on the disruptive side and gain as an investor, one should consider exposure to US-listed technology businesses and the most popular ETF to take this exposure is the Invesco QQQ, which tracks the NASDAQ 100 index,” Gupta said.
This index has 55 percent exposure to the technology sector and can be considered as a satellite exposure in addition to the S&P 500 exposure.
Sharma believes in diversification through S&P 500 and NASDAQ. “With the US Fed appearing to be at the tail end of their hiking cycle, now is a great time to start allocating to US technology and S&P 500 companies,” he said.
Tailwind Financial Services Joint MD Vivek Goel, however, prefers Mirae's S&P 500 Top 50 ETF and holds a slightly different view on NASDAQ. “If we look at the comparison with S&P 500, the Top 50 index has outperformed in seven out 11 calendar years and it provides diversification across sectors as opposed to Nasdaq which is largely tech and concentrated among the top stocks,” he pointed out.
Goel believes that when interest rates are rising and there is pressure on global growth, a more blended S&P 500 Top 50 portfolio as opposed to Nasdaq's high growth and valuation orientation can be beneficial in medium term.
Mirae’s S&P 500 Top 50 consists of 50 largest companies from the S&P 500 index, reflecting US mega-cap performance. Index constituents are weighted by float-adjusted market capitalisation. As per S&P methodology, S&P 500 stocks are considered as large-cap and S&P 500 Top 50 stocks are considered as mega-cap. It is a portfolio which gives exposure to multiple sectors by capturing the sector leaders.
What about Mutual Funds?
Another option for investing in overseas markets is international mutual funds which, among over 50 schemes available, also provide actively managed fund options. This basket has further option to take exposure in themes like electric vehicles (EV), artificial intelligence (AI) and healthcare.
Before going for this option, it’s important to understand the loads, fees and performance to make the mutual fund selection.
“Preferably, the investor should review the portfolio to understand the quality of holdings and have a sense of how the portfolio will perform in different environments, otherwise, investors should look for managers that have delivered alpha consistently, above the benchmarks,” Sharma said.
Goel prefers the schemes which take exposure to US markets as it provides exposure to a developed market along with allocation in latest trends. “Within the segment, PGIM India Global Equity Opportunities Fund is one we suggest with a strong track record and focus on innovation within the portfolio,” he said. The last year has seen correction in the growth segment and this now provides investors a good opportunity to come in at better valuations.
PGIM India Global Equity Opportunities Fund invest in units of PGIM Jennison Global Equity Opportunities Fund (the Underlying Fund), and or similar mutual funds. The PGIM Jennison Global Equity Opportunities Fund invest in US and non-US equity and equity-related securities, and may invest a significant portion of its assets in companies located in emerging markets.
The fund invests in companies with a market capitalisation of $5 billion and above. Its top 10 holdings include companies like Apple Inc, Tesla, Microsoft, LVMH Moet Hennessy Louis Vuitton, Hermes International and Ferrari among others.
It has generated close to 5 percent excess returns compared to MSCI All Country World Index during the periods of three years, five years, seven years, 10 years and also since its inception. During the past year, however, its performance has declined compared to the MSCI World Index. It generated minus-26 percent returns in Q2CY22 as compared to minus-15.7 percent of MSCI World Index.
Investing in stocks of companies listed on the US stock exchanges is also a good route for international diversification but it is also quite risky and requires sound understanding of the business and fundamentals of the companies an investor is targeting to invest.
According to Gupta, some of the strongest, most entrenched and businesses with significant future growth potential in the world are available at reasonable prices. For example, Amazon and Microsoft could be considered businesses that are hugely consumer centric and with the strongest moats. Amazon is a giant in US and international ecommerce and extremely entrenched in consumer life.
Similarly, its AWS cloud business is a leader in the business segment, especially, SMEs. Microsoft again is embedded with the PC and gaming in consumer life. Similarly, with its strength in enterprise software (windows and office) and Azure cloud, it is a leader in the enterprise and SME businesses.
One could also look at payments companies, such as Paypal or Discovery Financial Services. “These companies are likely to grow in line with payments and ecommerce which are both growing in double digits in the US”, added Gupta. However, he reiterates that this is not an option for first time investors looking to diversify in overseas markets.
Experts suggest that only investors with sound understanding of stock picking should opt for this option. Plus, investors need to be able to find credible source of research to understand the risk and reward potential and make well-informed decisions.
Multi-Cap and Multi Asset Strategies
Both Gupta and Goel recommend that instead of going for listed stocks, investors should consider a portfolio, such as Omni Supreme US which has been designed keeping balance sheet strength, growth potential, and discount to intrinsic values. It is a multi-cap strategy and has delivered a 3 year CAGR return of 29 percent in dollar terms. So for Indian investors, the depreciation in Indian Rupee is an additional return.
“Diversification across numerous growth vectors makes this portfolio much stronger than individual stocks”, said Gupta.
Mehra, on the other hand, adds a different perspective. She said that, various countries, geographies, asset classes and sectors go in and out of favour in terms of returns. For example, from 2003 to 2007, US markets were a big underperformer whereas the emerging market index went up over four times - India went up six times, Brazil ten times. Then, from 2010 to 2020, the US was a huge outperformer whereas emerging markets couldn’t perform.
"At various points, other asset classes like commodities, fixed income, precious metals, and real estate investment trusts (REITs) become more attractive and the asset allocation has to be shifted more towards these,” Mehra said.
She advises investors to have a multi-asset strategy to gain the benefits of all worlds. Global Multi Asset Allocation Portfolio (GMAAP) is one such product where an Indian investor can invest across asset classes using the Liberalized Remittance Scheme (LRS) of the RBI.
It is a global portfolio and has a low minimum entry threshold of $ 10,000 or around Rs 8 lakh. It invests in different assets ranging from Australian mining companies to South African REITs.
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