JP Morgan Asset Management has launched numerous international funds in India. Nandkumar Surti, MD & CEO, talks to Morningstar on the rationale behind such funds and why they need to find a place in the Indian investor's portfolio.
Earlier this year, your fund house launched a Europe-focused fund and followed it up with an Emerging Markets fund. This at a time when the BRIC countries are on shaky ground, barring India. In fact, India is a market everyone wants a piece of now.
As far as the Emerging Markets fund is concerned, we are probably 6 – 9 months ahead of the curve-- that is precisely what we want. Data reacts with a time lag. It’s the first offshoot of that rebound which you need to identify and capture. Look at the U.S. market for the last three years. If I had shown investors the same data around 18 or 24 months back, they would not have invested.
We did the same thing with the Europe fund, which is doing well now. At the first signs of reversal you try to capture and bring in the investors because once the data is visible to the entire world, the juice is relatively less. The big move comes when the data is just turning from negative to zero before turning positive. So that journey from negative to zero is what you would ideally want to capture when you are launching the fund.
Every time we launched a fund, we brought in a structurally 3-4 year story. We launched the ASEAN fund which continued for almost 4 years, while the China fund continued for 3 years or so. The U.S. fund is still doing well and continues to be an important theme because we believe that higher single digit or lower double digit returns are still possible. The Europe fund launched last year is a 3–5 year story. So as far as the Emerging Markets fund is concerned, we are probably 6 months ahead. But that is because we believe the most opportune time is now.
But why emerging markets in the midst of a bull run here?
Do not forget that the outlook for the Indian market changed post elections. Last year, India was undervalued and faced a very big event risk in the form of the elections. Now India is fairly valued with 1-year forward valuations at 15 times, which is the long term average. But again the market can trade higher based on how economic reforms accelerate from the current level.
Take a look at the calendar return of the Indian market and emerging market equities, based on the MSCI index. If you look at 10-year returns, there is not much difference between India and the rest. The MSCI marginally outperforms India. But when you look at the annualised volatility, the emerging market volatility is much less. For India, a 10-year return of 11% has a standard deviation of 32%. The similar return for MSCI comes at a standard deviation of 21-22%. So the volatility is much less given the basket of economies that we are talking about.
Till 2007, India was one of the top performing equity markets. Ever since the global financial crisis broke out, the Indian market has been volatile. This volatility is creating substantial damage to investors and that is where international investing becomes very important. The volatility of developed markets is far lesser than what you find in India. In 2011, Europe was on the verge of breaking, but when Europe was down 11%, India was down 37%. So when the crisis was sitting elsewhere, the major impact was seen in India which reflects the basic characteristics of the Indian market. It is way too volatile and that is precisely what we are trying to tell investors that you need to hedge against this volatility by diversification and by taking exposure to international equities. And within that, those markets which are lesser volatile or exhibit lesser volatility over longer time frames.
Of course, the world is going to talk about India at this point of time. And we are all excited about it. But as always, we promote international equity as a core allocation. And at this point of time we believe that emerging markets' equities will be a good theme to catch and will be very relevant 6 months from now. It is only a matter of time. The U.S. and Europe have been showing good economic data, Japan too. Economies of the emerging markets which are closely linked with the fortunes of the developed markets will start benefiting from the developed markets.
So yes. We are early in the market, but it is deliberate and precisely aimed at.
International funds as a core allocation?
Once again, look at the Indian market over the past 5 years. When the last government came in, there was lot of hope but those hopes were belied. At the same time, other global markets were doing well. The Indian currency lost around 35–40%. So when you have Rs 100 million and you do a mark–to–market of that in the international markets, what you could buy in the international market was destroyed to the extent of 35-40% because of currency devaluation.
That is why as part of the overall allocation that an investor has, we advocate exposure to international assets as well to give a hedge to the overall portfolio.
How much of allocation do you advocate?
Today, it is a miniscule portion. At some point of time we are looking to take it to 5%. Ideally, it should be at least 15% of any portfolio. We advocate this for a couple of reasons. One is the hedge from currency volatility. Two, India is not going to outperform every single year. Three, there will be equally good themes available across the globe that investors can be exposed to.
When you say themes, do you mean geographical themes or investment themes? In the international fund basket, JP Morgan has only geographical funds available for investors as of now.
The issue with investment themes is that once the theme runs out of steam, it gets challenging to retain investors. So we don’t intend to build assets which tend to be volatile. There are a lot many strategies available which can be core allocation for investors. I would rather concentrate on bringing in those. Going by the history of the Indian fund industry, investors have been severely burnt by playing with themes such as mining, agriculture and gold. We don’t want to enter into such theme-based funds.
Is there not a currency risk for investors in international funds? Do you offer any hedging mechanism?
Like I mentioned earlier, when we bring a product to the investors we always come with a 3–4 year theme and when the returns of the underlying markets are much stronger, then currency no longer becomes an important factor. What we emphasise is an exposure to a foreign currency asset and not exposure to currency per say. Exposure to this foreign currency asset acts as a hedge against the overall portfolio.
The current regulations don’t permit any hedging activity and hence it an investment in an international fund is an un-hedged exposure.
J.P Morgan has been the only fund house in India to have launched so many international funds. Are you trying to build a nice for yourself in the Indian market?
We are a global asset management company and have multiple products to offer which have an impressive track record spanning decades. These are multi-billion dollar funds. Why should the Indian investor not be exposed to them?
Amongst the products that we have, we cover almost 80% of the world geography with the exception of Latin America and Japan. It is a core strength for us and important in our overall strategy. Given our strong parentage and the suite of products it would be an absolutely wrong strategy for us to not concentrate on that.
We raised around Rs 110 crore for the Europe fund. Now the fund is around Rs 250 crore. Ditto with the U.S. and ASEAN funds. There is an appetite for these funds. Domestic equity funds lost around Rs 15,000 crore over the last 2 years. The international equity segment was the only one growing and we have a lions share in that particular category. That does not mean that we have been ignoring the domestic market.
Your domestic equity funds are not top-of-the-mind recall. Their performance has not been impressive.
We launched JP Morgan Equity Fund in May 2007 and our mid- and small-cap fund in September 2007. Soon after that the global financial crisis broke out and every equity fund on the street was bleeding. On the performance front, the mid- and small-cap fund has been a top decile fund for the last 5 years. When the fund was launched, the Sensex was at 21,000. We never did get a decent equity market.
Without a tied distribution, we raised Rs 120 crore for our JPMorgan Top 100 fund NFO. This was our opportunity to go to the market place and raise domestic equity money. You may ask any number of advisors as to which AMC was shouting from the roof top that the time to allocate money to domestic equity time was now - and they will name us.
JP Morgan is in the news internationally for launching an ETF. Any plans to do so in India?
Yes we are in the process of launching the first one in the U.S. But it is not a passive ETF. As of now, we are not looking at introducing ETFs in India.
