Overseas mutual funds' returns decline 7% in past 12 months despite rupee depreciation

MUMBAI: Domestic mutual funds, which invest in overseas equities, have failed to live up to the expectations of investors who desired higher returns and effective portfolio diversification. Despite a favourable rupee movement, international funds have delivered poor returns as a result of declining global markets and softening commodity prices.

International funds, as a category, have returned minus 7% over the past 12 months. Though, this genre of funds has performed better than domestic equity schemes, it has ceased to be high-return funds, as was the case some months ago. Funds, like HSBC Emerging Markets Fund, ING Latin America Equity, Mirae Asset China Advantage, JP Morgan Greater China Equity, Sundaram Global Advantage and Franklin Asian Equity, among several other funds, have fallen 11-22% over the past one year.

"Concerns of a global meltdown, including a hard-landing in China and policy-tightening across countries, have prompted commodity prices to fall. Almost all emerging markets have also corrected 10-20% since the beginning of this year. These factors have impacted returns on international funds," said Gopal Agrawal, chief investment officer of Mirae Asset Global Investments, which manages a global commodity fund and a China advantage fund.

According to fund researchers, international funds would have fared even badly had the rupee not weakened by about 12% since August this year. In general terms, funds that invest in foreign currency-valued assets benefit when local denominations weaken. For instance, an investor who redeems a one dollar worth of investments - made when the rupee was 44 to a dollar - will now get about 49, excluding capital appreciation, when converted to the rupee.

"Weakening of the rupee has not helped international funds. The reason for this is that currencies in countries, like Australia, Brazil and Indonesia, have weakened in tandem with the Indian rupee. There's not much of arbitrage opportunities on the currency side," Mr Agrawal said.

Most EM currencies, like Brazilian real, Russian rouble and Indonesian rupiah have depreciated significantly over the past few months. The currency of Brazil, where most Indian funds have exposure, has weakened from 1.55 per US dollar to 1.9 per USD. Emerging market wonder Indonesian rupiah has fallen from 8500 per USD to 9100 per USD over the past few months.

"Increased global volatility over the past quarter or so had an impact on emerging markets. Indian markets, which were underperforming for the most of the year, managed to hold their ground relatively better during this period," said KN Sivasubramanian, chief investment officer of Franklin Templeton Investments India.