Why niche foreign equity MFs don't suit all

Did you ever wish to invest in businesses operating in the realm of the global fight against climate change? Or in companies that deal in treatment and efficient use of water? Believe it or not, fancy new offerings in international equity funds are being lined up by domestic asset managers, dedicated to capturing such novel themes. But do you really need such ‘differentiated’ offerings in your global investment portfolio?Two new schemes have been proposed in recent weeks—BNP Paribas Aqua Fund of Fund and HSBC Global Equity Climate Change Fund. The themes addressed by the two funds seek to piggyback on the elevated interest surrounding the concept of sustainable investing—more popularly known as ESG (Environmental, Social and Governance)—with emphasis on the ‘E’. The premise behind both schemes is dealing with risks posed by climate change by investing in a portfolio of companies either resilient to those risks or providing solutions to the problem. This may include firms engaged in improving energy efficiency, providing clean, alternative energy or alternative meat and even addressing food waste.HSBC Global Equity Climate Change Fund, for instance, invests in companies that may benefit from transition to a low carbon economy. This is through participation in growth of companies with low carbon intensity or engaged in alternate energy, water and waste pollution management etc. BNP Paribas Aqua Fund of Fund seeks to invest in shares of international companies active across the entire water sector value chain: treatment and purification, installation, maintenance and renovation of water networks and management of these networks. The premise again is climate change, which exacerbates water scarcity through more frequent and intense droughts.Global funds come in multiple flavoursInstead of novel offerings, go for established funds with proven track record. 80598824Data as on 25 Jan 2021. Source: Value ResearchThese newer themes seek to carve their own space within a category still finding its feet in India. Over the past few years, international equity funds have clearly proven their utility. Several funds in this basket fetched smart gains even as domestic markets were stuttering until recently. US focused funds particularly yielded rich rewards for discerning investors. This has opened investors’ eyes to the huge diversification benefits on offer from taking global equity exposure. Yet, most have only recently started taking this route. Now that the segment is witnessing higher traction among investors, fund companies are looking to introduce newer offerings off the beaten track. Globally, there is a lot of interest for investments that make a positive impact on climate change. In the past few years, developed markets have seen a proliferation of equity funds and ETFs as well as green bond funds that allow investors to pursue this theme in different forms. The funds being lined up for domestic investors will in turn park money in these existing foreign funds.However, experts maintain that this avenue should be considered purely for the purpose of diversifying the portfolio. This should be in the form of traditional diversified equity funds—either investing across global equities or dedicated to US markets. Opting for any differentiated strategies or exotic flavours in this space should be strictly avoided. These are unnecessary distractions from the main goal behind investing abroad. Vidya Bala, Co-founder and Head – Research, Primeinvestor.in, argues, “Do not pursue narrow, novel themes within international equity funds. Keep it simple and invest abroad purely for diversification benefits.”Several US focused and other global equity funds have proven their credentials over the years with a healthy track record of performance. These are enough to provide you well-rounded global equity exposure. ESG-specific factors are likely to play a greater role in investments going forward. However, strategies riding these factors have only surfaced recently, making their long term worth hard to assess. In the absence of a reliable track record, investors should stick to proven concepts, insists Amol Joshi, Founder, PlanRupee Investment Services. “Funds targeting ESG related investment themes are largely unproven and belong on the fringes of the investment universe.”Bala argues that such concepts already find space in traditional funds. “Aspects like climate change and sustainability are already woven into the investment philosophy of several asset managers. So investors need not feel compelled to take dedicated exposure to such ideas.” Besides, niche themes like water sector provide very limited investible opportunities even globally, she adds.Joshi maintains that investors need international allocation only to an extent, say up to 10-15% of their portfolio. Spreading your international bets thin by having multiple funds within this allocation will not lend any material benefit. Instead, he suggests sticking to a simple, diversified index-based exposure in the form of Nasdaq100 or S&P500 index.

from Economic Times https://ift.tt/36FkPdm