Mf category analysis china focused indian mutual fund schemes


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Mf category analysis china focused indian mutual fund schemes

  1. 1. 1Mutual Fund Category Analysis February 05, 2013 Category Analysis: China Focused Indian Mutual Fund schemes Relative performance of Indian Mutual Fund schemes which focus primarily on Chinese stocks: Note: Trailing Returns up to 1 year are absolute and over 1 year are CAGR. NAV/index values are as on January 28, 2013. Key takeaways: The Indian Mutual Fund schemes which invest predominantly in Chinese markets are likely to deliver notable returns going forward given the upward momentum in Chinese stocks in the recent periods that are rebounding from distressed levels. Reflecting these sentiments, these China focused equity oriented schemes have done comparatively well in the past and managed to outperform their benchmarks, domestic counterpart indices and domestic diversified equity category. The pessimism over China growth story in 2012 was unwarranted even as the valuation of Chinese stocks became extremely cheap and the economy started to bottom out and turned around. Given that the growth forecasts are being revised up, combined with very cheap valuations, Indian investor may capitalize this opportunity by investing in the above mentioned schemes to participate in the China’s rebound growth story. Given the fact that Chinese equities bear comparatively little correlation to the Indian equities, high risk appetite investors who wish to add geographical diversification to their portfolios can consider investing in the schemes with minimum investment horizon of two years or so.China Focused Indian Mutual Fund Schemes Retail Research
  2. 2. 2Mutual Fund Category Analysis contd… China - a growth perspective in the near term: China, the worlds largest emerging market, is showing signs that the economic slowdown is gradually improving and China is ready to become the primary driver of global economic growth. China is one of BRIC (Brazil, Russia, India and China) countries, which are labeled as the high economic growth regions all over the world. The Chinese economy has been witnessing decelerated growth in the recent years on the back of various issues. The market has underperformed MSCI Emerging Markets by about 10% over the last three years (ending December 31, 2012). The Shanghai Stock Exchange composite index has closed last month at a four-year low. Chinese stocks are selling at a significant discount to both other Asian emerging market countries and to their own historical averages. However, the pessimism over growth has been unwarranted given the fact that the valuation of Chinese stocks has become extremely cheap and the slowdown in the economy has started to bottom out and turned around. Latest economic data shows more positives than negatives and the recent destocking phase appears to be largely over. The economic growth will continue to benefit from the investment momentum in the infrastructure sector, ending de-stocking in the manufacturing sector, and accommodative liquidity conditions. The new leadership appears poised to implement potentially transformational reforms beginning in 2013, which should have important effects on strengthening critical segments of the economy including consumption, banking, the stock market, currency, and infrastructure, through an increased emphasis on urbanization. Improved demand, renewed price uptrend, continued double-digit growth in industrial enterprises profits and earnings upgrades which turned positive in the last month (first time since June 2011) are the positive tickers to the investors sentiment. Overall speaking, China equities are likely to continue their recovery in the short term as expectations of a cyclical improvement for the China economy coupled with potential economic reform measures and a pickup in corporate earnings will continue to drive the normalization of market valuations.China Focused Indian Mutual Fund Schemes Retail Research
  3. 3. 3Mutual Fund Category Analysis contd…GDP growth comparison:Global stock market PE ratios:China Focused Indian Mutual Fund Schemes Retail Research
  4. 4. 4Mutual Fund Category Analysis contd… Domestic Mutual Funds Focusing mainly on Global Equities: Indian Mutual Funds that invest primarily in foreign economies are called as Global Funds. There are 33 schemes in the Indian Mutual Fund Industry coming under Global funds category and investing predominantly in overseas markets either directly or through fund of fund routes. They enable Indian investors to expose into foreign equities. Why invest in Global Mutual Funds? The category is considered as good alternate asset class as they provide geographical diversification, offer an opportunity to take part in the world’s booming economies and growing stock markets. By investing in global mutual funds, investment portfolios become further diversified because these funds get exposure to industries that may not be well represented in Indian market. There may also be times when the domestic share market is weak but some overseas markets are performing well. Of course, there will be lesser risks if the funds reach is wider. However, given the global uncertainty, investors can take a call on schemes that provide better geographical as well as market diversifications based on their risk profiles. Country Specific Global Mutual Funds: The Global Funds are further classified as Broad based and Country or region specific funds. In this note, we cover country based Global Funds that invest primarily in Chinese equity markets. Advantage & Disadvantages of investing in Country specific Global mutual funds: Advantages: The primary advantage of investing in country specific global funds is that the stock markets of such countries are often uncorrelated with the domestic market. Investing in diverse and uncorrelated assets gives the best long-term results because different assets classes will do well at different times. The added risk that one accepts by investing in these countries can lead to larger gains. Disadvantages: The drawback to investing abroad is that some of the factors that affect the success of investment are difficult to understand, or predict. Political unrest can lead to losing an investment in a particular country. Losses can also be created by the relationship between the multiple countries, or by large shifts in the currencies in play.China Focused Indian Mutual Fund Schemes Retail Research
  5. 5. 5Mutual Fund Category Analysis contd…. Chinese focused Indian mutual Funds: There are three mutual fund schemes in India which predominantly investing in Chinese equity markets such as JPMorgan JF Greater China Equity Off Shore, Mirae Asset China Advantage and GS Hang Seng BeES. JPMorgan JF Greater China Equity Off Shore and Mirae Asset China Advantage are Fund of Funds (FoF) while GS Hang Seng BeES is an Exchange Traded Fund (ETF). The underlying fund for JPMorgan JF Greater China Equity Off Shore is JPMorgan Funds - JF Greater China Fund which invests primarily in companies from the People’s Republic of China, Hong Kong and Taiwan (Greater China). This tracks MSCI Golden Dragon Index (Total Return Net) as benchmark. The underlying fund for Mirae Asset China Advantage Fund is Mirae Asset China Sector Leader Equity Fund which invests in equities of sector leading companies domiciled in, or exercising a large portion, of their economic activity in China and Hong Kong. GS Hang Seng BeES is an Exchange Traded Fund which tracks Hang Seng Index as benchmark. Hang Seng Index is a constituent of 50 largest companies of the Hong Kong stock market and is the main indicator of the overall market performance in Hong Kong. It represents about 60% of capitalisation of the Hong Kong Stock Exchange. Basic details:China Focused Indian Mutual Fund Schemes Retail Research
  6. 6. 6Mutual Fund Category Analysis contd… The mutual fund schemes that focus mainly on Chinese equities have managed to outperform/track closely their respective benchmarks as well as domestic indices during various time frames all thanks to the rebounded Chinese equity markets coupled with depreciation of INR against USD. Like India, China has been also the victim of global headwinds over periods. However, the Chinese equity market gained positively in the recent periods on the back of some early signs of stabilization in the economy in the fourth quarter 2012 coupled with the sharp rally of the China onshore equity market. JPMorgan JF Greater China Equity Off Shore, Mirae Asset China Advantage and GS Hang Seng BeES clocked 29%, 19% and 29% of CAGR returns for the last one year period respectively. For the same time the domestic barometer Sensex delivered 18% while Average of Indian MF Equity Diversified Category and MSCI All China (INR) posted 19% and 17% of returns respectively. The three year performance also commendable for the funds in comparison to the benchmarks. Relative Performance of the Chinese focused schemes Vs. Benchmarks:China Focused Indian Mutual Fund Schemes Retail Research
  7. 7. 7Mutual Fund Category Analysis contd…Correlation among indices and currencies:Chinese focused Indian MF schemes got benefitted on the back of INR depreciation against USD:China Focused Indian Mutual Fund Schemes Retail Research
  8. 8. 8Mutual Fund Category Analysis contd…. Other Facts: A country specific global mutual fund is one in which the manager selects securities from a specific country in an attempt to mirror or outperform the prevailing stock index in that country. Further, investment in emerging markets are subject to a higher volatility than more developed markets due to greater political, tax, economic, social, and foreign exchange, risks, etc. The size and trading volume of securities markets in emerging markets may be substantially smaller than developed markets (though not in the case of Chinese market). This may subject the funds to higher liquidity and volatility risks. Custody and registration of assets in emerging markets may be less reliable than in developed markets, which may subject the funds to higher settlement risk. These funds may be subject to higher regulatory risks due to low level of regulation, enforcement of regulations and monitoring of investors’ activities in emerging markets. Currency risk: As the investors broaden their investment universe by investing through global funds, they must also bear the risk associated with fluctuations in exchange rates. (the rupee is first converted into dollar and then into the local currency for investing abroad and vice-versa). Fluctuations in these currency values, whether Rupee or USD or the currencies of the countries where the mutual funds invest, can either enhance or reduce the returns. To put in simple terms, if the rupee appreciates vis-à-vis the dollar, the returns from the scheme (that invests in US$ denominated assets) will be adversely affected and vice-versa. Higher Cost: In case of FoF, expense fees and management costs are higher than normal MFs, as the cost structure will include the fees of the underlying mutual funds as well as the FoF. Expense ratio for these funds ranging from 0.42% to 2.50%. This excludes the expenses ratios of funds in which these funds invest. Tax Implication: Global funds lose out on capital gain and DDT benefits as far as tax implication for Indian investors are concerned as they are treated like debt oriented funds and not equity oriented funds. Hence, They are liable to pay income distribution tax (DDT) of 12.5% and 30% ( + sur-charges & Cess) on the distribution of income to individual and Corporates, respectively. Short-term capital gains are taxable as per the investor’s tax bracket while long term capital gains are taxed 10% without indexation or 20% with indexation.China Focused Indian Mutual Fund Schemes Retail Research
  9. 9. 9Mutual Fund Category Analysis contd… Appendix A: Benefits of investing in Global funds: 1. Diversification: Investors can diversify their portfolio through geographical diversification in addition to domestic asset classes like equities, debt, commodities etc. 2. Stability: Global markets often perform in contrast as different countries go through different economic cycles. By having investments across countries and currencies, investors can ensure steady and stable returns on their investment. 3. Hedging: Investors who have future dollar expenses (for example, parents planning to send their children to US for higher education, importers having dollar commitments, etc.) can hedge against any future depreciation in the rupee vis-à-vis the US dollar by investing in such schemes. Risks of investing in Global funds: 1. Currency risk: The fluctuations in the currency will still have a good or bad effect on the portfolio despite the fact that the international economies are doing quite well. Its hard to say that deprecation in Rupee value versus USD always benefits the global funds, which depends mainly on the countries where the funds exposed to. 2. Fund manager’s expertise: The performance of global funds depend on the expertise of fund managers in handling international funds as this involves not only economic forecast of different regions,commodities etc but also rupee-dollar and other currency equations. 3. Higher Cost: In case of FoF, expense fees and management costs are higher than normal MFs, as the cost structure will include the fees of the underlying mutual funds as well as the FoF. Expense ratio for these funds ranging from 0.42% to 2.50%. This excludes the expenses ratios of funds in which these funds invest. 4. Country-specific risks include political and economic instability in the country your investments are exposed to.China Focused Indian Mutual Fund Schemes Retail Research
  10. 10. 10Mutual Fund Category Analysis contd…Appendix B:Understanding the Chinese Stock Market: Stocks Introduction: A – Shares: China A-shares, which comprise the 55% of the total China equity opportunity set, are securities listed on the Shanghai or Shenzhen Stock Exchanges and traded in Renminbi. Presently, China A-shares are only accessible by foreign investors via the QFII scheme, mutual funds operated by managers with a QFII quota or through the participation in the A-share ETF products listed mainly in Hong Kong. B - shares are China securities incorporated in China and listed on the Shanghai Stock Exchange (in US dollars) or Shenzhen Stock Exchange (in HK dollars). H-shares are China securities incorporated in the People’s Republic of China (PRC), listed on the Hong Kong Stock Exchange and traded in Hong Kong dollars. Red Chips refer to China securities that are not incorporated in the PRC, but that are listed on the Hong Kong Stock Exchange and (directly or indirectly) controlled by organizations or enterprises that are owned by the state, provinces, or municipalities of the PRC. P Chips are China securities owned by PRC individuals, incorporated outside PRC and listed on the Hong Kong Stock Exchange. These companies typically derive a majority of their revenues from the PRC and/or have the majority of their assets located in the PRC. As of July 31, 2012, these B, H, Red Chip & P Chip share classes collectively represented approximately 42% of the total China investment opportunities as proxied by their index market capitalization weights. Major Exchanges in China: Shanghai Stock Exchange (SSE) was founded on Nov. 26th, 1990 and in operation on Dec.19th the same year. It is a membership institution directly governed by the China Securities Regulatory Commission (CSRC). A large number of companies from key industries, infrastructure and high-tech sectors have not only raised capital, but also improved their operation mechanism through listing on Shanghai stock market. Shenzhen Stock Exchange (SZSE),established on 1st December 1990, is a self-regulated legal entity under the supervision of China Securities Regulatory Commission (CSRC). SZSE is committed to its mission to develop China’s multi-tier capital market system. It gives full support to development in small and medium businesses and implementation of the national strategy of independent innovation. The SME Board was launched in May 2004. The ChiNext Market was inaugurated in October 2009.China Focused Indian Mutual Fund Schemes Retail Research
  11. 11. 11Mutual Fund Category Analysis contd…. Major stock indices in China: Shanghai Composite Index is an index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. The base day for SSE Composite Index is December 19, 1990. The B share stocks are generally denominated in US dollars for calculation purposes. For calculation of other indices, B share stock prices are converted to RMB at the applicable exchange rate (the middle price of US dollar on the last trading day of each week) at China Foreign Exchange Trading Center and then published by the exchange. The SZSE Component Index is an index of 40 stocks that are traded at the Shenzhen Stock Exchange. The base day for SZSE Component Index is July, 20, 1994 and the base value is 1000. Only companies which meet the criteria set by the SZSE are possibly selected as constituent stock of the Index, including a long history as a listed enterprise, a market cap large enough, a positive earning scenario, being actively traded and representative in its industry or sector. CSI 300: As a joint venture between the Shanghai Stock Exchanges and the Shenzhen Stock Exchange, the China Securities Index Company Limited (CSI) is a professional business entity specializing in the creation and management of indices and index-related services. CSI 300 aims to reflect the price fluctuation and performance of China A share market. Hang Seng Index was started on November 24, 1969, and is currently compiled and maintained by Hang Seng Indexes Company Limited, which is a wholly owned subsidiary of Hang Seng Bank, one of the largest banks registered and listed in Hong Kong in terms of market capitalisation. Hang Seng Index is a constituent of 50 largest companies of the Hong Kong stock market and is the main indicator of the overall market performance in Hong Kong. It represents about 60% of capitalisation of the Hong Kong Stock Exchange. Analyst: Dhuraivel Gunasekaran. (Database sources: AMC Sites, NAVIndia and Ace MF) HDFC Securities Limited, I Think Techno Campus, Bulding –B, ”Alpha”, Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone (022) 30753400 Fax: (022) 30753435 Disclaimer: Mutual Fund investments are subject to risk. Past performance is no guarantee for future performance. This document has been prepared by HDFC Securities Limited and is meant for sole use by the recipient and not for circulation. This document is not to be reported or copied or made available to others. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied upon as such. We may have from time to time positions or options on, and buy and sell securities referred to herein. We may from time to time solicit from, or perform investment banking, or other services for, any company mentioned in this document. This report is intended for non Institutional Clients.China Focused Indian Mutual Fund Schemes Retail Research