Morningstar’s fund research team has released Offshore Fund Spy Report for December quarter 2020. This report provides insights into performance, estimated flows, and asset trends for offshore funds focused on the Indian equity market. The flows are estimated from assets and total returns for the quarter ended December 2020. An offshore India fund is one that is not domiciled in India but invests primarily in Indian equity markets.
The India-focused offshore fund and ETF category has been witnessing consistent net outflows since February 2018.
The intensity reached its peak in the March 2020 quarter, as almost $5 billion left its coffers. This was the highest quarterly net outflow that the category has ever witnessed. Although net outflows continued during the June, September, and December quarters of 2020, their intensity moderated considerably. The December 2020 quarter witnessed net outflows worth $986 million compared with a $1.8 billion net outflow in the September quarter.
It should be noted that India-focused offshore funds and ETFs are some of the prominent investment vehicles through which foreign investors invest in Indian equity markets. This was the 11th consecutive quarter of net outflows for the category. The gravity of the situation can be gauged from the net outflows in 2020, which amounted to $9.3 billion. This was noticeably higher than the net outflows the category had in 2018 ($5.3 billion) and 2019 ($5.9 billion).
Within the India-focused offshore funds and ETF category, the India-focused offshore fund segment witnessed net outflows of $1.9 billion during the quarter ended December 2020, which was higher than the net outflows of $1.6 billion in the previous quarter. With this, India-focused offshore funds have not witnessed net positive flows since February 2018.
From February 2018 to December 2020, there have been net outflows of approximately $18.0 billion from this segment. Through 2018, there were net outflows of $3.7 billion; Which shot up to $5.6 billion in 2019 and further up to $ 7.7 billion in 2020. Before this, the India-focused offshore fund segment experienced consistent and prolonged net outflows from the quarter ended September 2015 to the quarter ended December 2016, when almost $3.1 billion of assets eroded from it. However, this time, the outflows have been more severe and prolonged.
India-focused offshore ETFs however witnessed a divergent trend this quarter as they received net inflows after five consecutive quarters of net outflow. The quarter ended March 2020 was one of the worst months for the segment as it witnessed net outflows of $1.4 billion. Again, this was the highest quarterly net outflows ever recorded for the segment. Though the net outflows continued through the quarter ended June 2020 and September 2020, they moderated significantly. While India-focused offshore ETFs witnessed net outflows of around $776 million in the June 2020 quarter, in September 2020, this fell to $218 million, and resulted in a robust net inflow of $882 million during the December 2020 quarter.
From February 2018 to December 2020, the India-focused offshore ETFs segment witnessed net outflows of $3.5 billion, which in the last quarter stood at $ 4.4 billion. During calendar years 2018, 2019 and 2020 India-focused offshore ETFs experienced net outflows of $1.5 billion, $199.6 million, and $1.5 billion, respectively.
Flows into India-focused offshore funds are generally considered to be long-term in nature, whereas flows into India focused offshore ETFs indicate flows of predominantly short-term money. From February 2018 until December 2020, India-focused offshore funds witnessed significantly higher net outflows (of $18 billion), compared with net outflows (of $3.5 billion) from the India-focused offshore ETF segment. The higher net outflows from India-focused offshore funds indicate that foreign investors with long-term investment horizons have been adopting a cautious stance toward India. Although this is concerning, it is not entirely unexpected, given the country's current economic landscape and uncertainty over how soon India will be back on growth trajectory. That said, India equities continue to attract foreign investments through direct equity as well as the ETF route.
The future trend of the flows in the India-focused offshore fund and ETF category would revolve around how India fares in its fight against the pandemic versus other comparable countries and how the government brings the country's economy back on track amid multiple hindrances. The launch of the COVID vaccine in India and the measures announced by the government in the Union Budget to boost the economy should help in the reversal of this trend going ahead.
Download the full report here.
