HDFC Mutual Fund has launched HDFC Developed World Indexes Fund of Fund (HDWI/FoF), an open ended scheme focussed on international equities. The NFO is open till October 1. Over the last year there have been quite a few FoF launches trying to tap domestic investor’s appetite to diversify into international investments, and this is the latest one to join the bandwagon.
Diversified passive fund
HDWI is a passive fund that will invest in units/shares of overseas index funds and/or ETFs that will, in aggregate, track the MSCI World Index (MCWI). HDWI will invest in Credit Suisse index funds and ETFs to achieve this objective. The underlying index MCWI is a developed markets index spanning stocks in 23 countries and covering 85 per cent of the free float adjusted market capitalisation in each country. The countries/regions included in the index are the US, Canada, continental Europe, the UK, Israel, Japan and Pacific (excluding Japan). It has 1,500-plus constituents, opening the excessive diversification argument.
Combined, the stocks represent around 50 per cent of the global market capitalisation.The top constituents in the index are the typical global large-caps you hear about regularly — Apple, Microsoft, Amazon, Alphabet, Facebook, Tesla, JP Morgan, etc, from the US; Nestle, Unilever from Europe and Toyota, Sony, etc, from Japan. A few top constituents like Louis Vuitton, Tokyo Electron and Nintendo are less commonly heard, but their relative weights are dwarfed by the US heavyweights.
As is the case with many world indices, the US dominates this index as well with around 68 per cent share as of July 30. This is closely followed by Europe at 19 per cent, Japan at 7 per cent, and other regions making up for the balance 6 per cent. However, the diversification appears better if it is classified based on source of revenue i.e the regions from which the listed companies derive their revenue. On that basis, the dominance of US is lower, with North America at 42 per cent, Europe at 23 per cent, emerging markets at 20 per cent and Pacific region at 15 per cent.
In terms of sectoral exposure, Information Technology tops the pecking order at 22.5 per cent, followed by financials and healthcare at around 13 per cent. The rest is split amongst industrials, consumer staples/discretionary energy, materials, etc.
Broadly, the index appears to be spread across the spectrum — regions (and currencies) and sectors. The scheme is expected to have an expense ratio of 0.40 per cent for the direct plan, while the regular plan could be priced higher at 1 per cent.
As per the fund presentation, the index has a mixed track record versus the Nifty 50 when compared in USD terms. On 5 and 10-year CAGR returns, it has significantly outperformed Nifty 50 with 14.3 and 11 per cent returns (vs Nifty 50 USD TRI at 11.8 and 6.8 per cent). However, it has underperformed on a 15-year basis and significantly more so, on a 20-year basis with CAGR of 7.9 and 7.4 per cent respectively (vs Nifty 50 USD TRI at 9.2 and 13.4 per cent). Broadly, its performance has low correlation with Nifty 50, with 3, 5, 10 and 20 years correlation at around 0.4.
From a diversification perspective, this can be viewed as moderate.
As an FoF investing in overseas funds, the scheme will be treated as a debt fund for taxation purposes.
Wait and watch
The debate is still out there on passive versus active funds. Both have their advantages and disadvantages. If a domestic investor were to look at international passive funds as a way to diversify, a thematic passive fund is also an option as different regions/countries have different themes gaining traction. As a very diversified generic index, HDWI does not offer either regional or innovative themes. Yes, diversification reduces risk. But the rewards may also not always be fruitful, going by the mixed track record of MCWI vs the Nifty showcased above.
Another factor to note is that global markets currently are a function of central bank liquidity paradigm. A wait and watch approach — on how markets react to, one, the start of tapering by central banks (the US Fed last week made it clear ‘tapering is coming soon’) and, two, inflation data in global economies over the next few months — would be sound.
Currently, expert opinion is widely divided between ‘inflation is transitory’ and ‘tapering will not impact markets’, to ‘inflation will be persistent’ and ‘central banks will be forced to accelerate tapering’ which will impact global markets negatively.
Broadly, with current market levels factoring the former and not giving much consideration for the latter, the risk-reward into investing in global funds is not favourable right now.