Why Investors Need Global Equity Exposure
GAURAV RASTOGI: So, let’s break it down into two or three different parts. Let’s say the first part is, who should invest in international funds? Ideally, everyone should have an international allocation in their portfolio. Allowances are percentages of your portfolio, regardless of the size of your corpus. Someone doing a Rs 5000 SIP vs. someone doing a Rs 50,000 SIP vs. someone doing a Rs 5 lakh SIP, as a percentage of your wallet, if minimum requirements are allowed by a fund, then you should think about an international investment for several reasons. I’ll just give you a quick rundown of why we should think about it. Most important, of course, is diversification. We usually look at the S&P 500 and what we find, over the last 20 years, is the 3 year moving correlation which basically means S&P 500 and Nifty 50, are they moving together or how much are they moving together? Thus, assets that grow together do not add diversification to your portfolio. Assets that don’t tend to move together add diversification to your portfolio. So what we’re finding is that the three-year average correlation over the last 20 years is around 30-34%, which is kind of the correlation that you’ll also find between G-Secs and Nifty 50. So this offers you diversification.
Second, if you think of the MSCI World Index, I mean sometimes we’ve said it before: if an alien lands on earth and has no idea what India is, what is the United States and what an index portfolio wants to own, by default. they will end up owning 66% of the American market because that is the weight of the MSCI World index. By the lottery of birth we were born Indians, that does not mean that we have to have disproportionate investments in India. There is a term for it, it’s called domestic bias. The tendency of investors to invest disproportionately more in assets in their home country or assets they know best. So, these are some of the reasons. US companies generate about 29-45% of their revenue overseas. So a diversified portfolio gives you global exposure, also helps you avoid this domestic bias. So pretty much everyone should have international exposure.
Coming to the second question, who actually invests and how much they invest. So it’s very interesting for us to look at the data as well. On average, what we see is that across all portfolios around 5.5% of the portfolio is allocated to international exposure and the majority is done through mutual funds. Is this the correct amount? It is very difficult to say, our calculations indicate that the allocation should be between 10 and 20%. In the past, we have recommended an allocation of around 13% to international assets dating back to 2017. What people are investing in is again very interesting. Both the questions and your observation that there has been a recent flow of international funds must be viewed through the lens of what international funds have done in the recent past. Whether you look at the Nasdaq or the S&P 500, the returns have been really good. Fund houses see it, investors see it too. So we see that the Nasdaq 100 fund is very popular as an asset of Motilal, it is one of the oldest Nasdaq 100 funds in the market. It is very popular in which users invest. When we first recommended international funds to our portfolio in 2017, I think our choices were limited to four or five in order, a few of which were sector funds. There was the DSP Mining Fund which is a fairly old fund, there is a DSP Agriculture Fund which is also a very old fund. If you look at broad market funds, I think Franklin offered one and Franklin still offers one, I should say. So Franklin offers one and ICICI offers one. Our recommendation was the ICICI Prudential US Bluechip Equity Fund.