Investment Focus - Franklin US Opportunities Fund: Buy :: Business Line

   

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Is your equity portfolio invested entirely in Indian stocks? Then it is a good idea to diversify it now, by buying a mutual fund that invests in the US stock market. The FT Feeder US Opportunities Fund is a good option, given its good five-year track record.

Allocating 10 per cent of your equity portfolio to a US focussed mutual fund may improve your returns over the next two-three years, for three reasons.

DIVERSIFY FROM RUPEE RISKS

One, it will protect your portfolio against the risk of a weakening rupee. With high forex expenditure on inputs as well as sizeable dollar-denominated debt, many Indian companies are likely to take a hit to their profits from the weak rupee in the coming quarters. Thus, it is necessary to allocate at least a part of your portfolio to dollar-denominated assets.

Two, with the US economic recovery gaining pace, select US companies in the consumer and industrial space may deliver strong earnings growth and returns, superior to many Indian companies. Yes, India’s economic growth at about 6 per cent is forecast to outpace that in the US (3 per cent) in 2014, but investment prospects depend more on incremental growth than on absolute numbers. The US economy is expected to show greater acceleration than the Indian economy in the next one-two years.

Three, owning US stocks will protect your portfolio from the effects of any withdrawal by FIIs (foreign institutional investors) in response to the Fed winding down its stimulus programme. Capital outflows pose a significant risk to the Indian markets, its currency and its companies. Note the damage to the Rupee from FIIs withdrawing $ 7 billion in June; yet this amounted to just 4 per cent of their outstanding investments till date in India.

CHEAPER TOO

Relative valuations and greater earnings visibility in the US also support this argument. While the Indian market (CNX 500) trades at a price-earnings multiple of about 17.5 times trailing 12-month earnings, the US S&P 500 trades at 15.6 times. Yet, while Indian companies have managed a 6.5 per cent profit growth over the past two years, US companies (making up the S&P 500) have delivered 22 per cent.

WHICH FUNDS?

If you’ve decided to diversify into US stocks, doing so through mutual funds seems to be the best route, as they offer active stock selection and diversification benefits. There are presently three equity funds in India dedicated to US stocks- Franklin India Feeder US Opportunities Fund, DSP BlackRock US Flexible Equity Fund and ICICI Pru US Bluechip Fund. The last is recently launched and has a limited track record, while the first two redirect your money into established US-based equity funds.

Both are feeder funds and have managed to beat their benchmarks over 3 and 5 years.

But the FT US Opportunities Fund has fared better over the last three years as well as one year, with a compounded annual return of 17 per cent in dollar terms in both periods. The Indian feeder fund has delivered even better returns, supported by Rupee weakness. This fund deploys your money in US listed bluechip stocks.

Two caveats here: Allocate only a portion of your portfolio to US stocks, as India’s stock market prospects may still be superior over the long term. Invest in phases to reduce timing risks.