A number of AMCs are planning to launch overseas fund of funds despite low interest from retail investors.
Most AMCs having a foreign partner provide overseas fund of funds to their investors. These funds come with a host of strategies, offering exposure to emerging markets, developed markets, gold companies, commodities, agriculture and real estate, to name a few.
Indian currency’s depreciation against the dollar brought these funds in the limelight recently. Investors reacted by booking profits with the category witnessing net outflows of more than Rs 300 crore from overseas fund of funds in 2012.
The market downturn in 2008 made high net worth investors explore markets beyond India. Since the onset of financial crisis in January 2008, when the BSE Sensex started sliding from the 20000 levels to reach a low of 8047 in March 2009, nine overseas funds got launched. When markets took off from March 2009 onwards, only three funds were launched. Since 2010, when markets started to fall again, AMCs flooded the market with 11 more overseas funds. This suggests that AMCs go slow on global fund launches when the Indian markets start picking up and vice-versa. Fund officials say that many HNIs and ultra HNIs look for diversifying their allocation beyond India when the local markets are not doing well. This is one of the factors on which AMCs decide the launch of overseas funds. “There was a lot of interest in gold in 2008 when the gold stock funds like BlackRock Gold Fund took off. After that investors’ interest has moved to Gold ETFs,” says a product head of a private sector AMC. DSP BlackRock introduced its Global Gold Fund in India in 2007 through DSPBR World Gold Fund. This fund collected in excess of Rs 420 crore in its NFO. This fund provided an exposure to global gold mining companies to Indian investors.
Launched in 2004, Principal Global Opportunities, which manages Rs 33 crore, is the oldest global fund in the industry today. The fund invests in Principal Global Investors Funds - Emerging Market Equity Fund - (PGI-EMEF), a fund advised by Principal Global Investors - LLC (USA). Three years after that, Sundaram launched a Sundaram Global Advantage Fund which collected a decent Rs 150 crore.
"The main reasons are the performance of the Indian equity markets and lack of awareness about the benefits of international diversification. However, we are witnessing a change in demand since 2008, as the increased market volatility in domestic markets has highlighted the need to diversify across currencies. However, like in other global markets, products focusing on local markets will continue to dominate in comparison to international products," said Jaya Prakash K, Head-Products, Franklin Templeton Investments, India.
Regulatory restrictions
"Well-established global funds currently being sold across the world, can provide Indian investors an easy and effective route to diversify their portfolio. Currently these funds are not available to Indian investors seamlessly as the varied investment restrictions disqualify them and direct distribution of such products is not allowed.
Also to get foreign regulators to allow distribution of Indian products through the QFI route, SEBI could get into reciprocal agreements with various jurisdictions (that are deemed to have adequate investor protection norms) for distribution of foreign mutual funds in India. For example, cross-border funds registered in domiciles such as Luxembourg and US, are allowed to be distributed with adequate notification in various countries," adds Jaya Prakash.
Due to the regulatory curbs, some foreign AMCs are not able to launch some of their flagship funds operating outside India in the domestic market. “The feeder funds collect some Rs 50 to Rs 100 crore in India. The fund managers can’t change the investment strategy of these master funds for a few crore. For instance, one of our funds uses currency derivatives to neutralize the impact of cross currency movement which SEBI is not comfortable with,” said a senior official from the industry.
In fact, overseas funds for which offer documents were filed over ten months back have not been launched yet. These are HSBC China Consumer Opportunities Fund, Reliance US Dollar Fund, BNP Paribas Russia Fund and J P Morgan US Growth Equity Offshore Fund and Baroda Pioneer Global Equity - Gold & Mining Fund. Pankaj Sharma, EVP, DSP BlackRock Investment Managers says that the key parameters AMCs evaluate before launching overseas funds are prevailing market scenario, expected future outlook on the economy, sectors and market segments.. “The starting point for any new product development is identification of an investment opportunity. We like to keep our ears to the ground, and value feedback that comes from our distributors/clients. Our close linkage to BlackRock also helps us in coming up with new ideas and products,” says Pankaj.
SEBI also has a ceiling on the overall investment limits that can be made overseas by Indian mutual funds as well as exposure limits to certain instruments/securities within the overseas funds.
“There is an aggregate ceiling for overseas investments by mutual funds of about USD 7 billion, and limits per AMC. Feeder funds should ensure that exposure to certain restricted assets like unlisted securities, debt securities below investment grade, etc. should not be more than 10% of the net assets of the parent funds. Also there is an overall ceiling of US $ 1 billion, for investment in overseas ETFs, subject to a maximum of US $ 50 million per mutual fund,” explains Pankaj.
