It is of utmost importance that one needs to check their portfolio in this kind of market scenario. In our last-to-last article, we have covered the background story of why you should revisit your portfolio strategy and how one can deal with things while reviewing/revisiting their mutual fund portfolio (https://bit.ly/3PLYUpp). This article extends the same while guiding a certain level of decision-making on your international fund allocation while reviewing your mutual fund portfolio.
Retail investors have diversified their portfolios internationally over time. Now let’s try and understand the extended backstory behind the performance of international funds. Below is the performance of the top 10 international funds by AUM:
The Backstory:
The above underperformance results from elevated inflation worldwide, due to which consumer inflation in the US has reached a 40-year high. China’s Covid-led lockdowns and the Russia-Ukraine conflict have heightened supply chain disruptions. In action, US Fed has begun a rate hike cycle to reduce the size of its balance sheet.
Secondly, another factor that has resulted in the underperformance of international funds as a category, especially in the emerging market space, is that foreign institutional investors have pulled out funds from emerging markets and caused considerable volatility.
Fund managers’ global preferences have swung from growth to value stocks. Theoretically, high-growth companies or secular growth companies tend to take a breather whenever there is a change in the interest rate regime. And hence you will see funds managers are flocking more towards cyclical stocks, making growth stocks-oriented strategies take a backseat.
They are now coming towards the US tech-centric funds such as the Nasdaq 100 and Franklin Feeder US Opportunities Fund. Tech stocks have performed exceptionally well during a pandemic; however, as the population returns to work and spends less time at home, the tech sector is getting impacted as investors are concerned about those valuations boosted by the pandemic coming at a moderation. Investors were dumping shares from gadget makers, semiconductors, and social media behemoths to OTT platforms. The drop in earnings of some companies is perhaps the most significant sign that the pandemic boom has finally moderated.
On the flip side, the US tech space has mature companies with established revenue models and profitability. Prices of both sets of companies have fallen. But while more established and mature companies have lost 25-30 percent from their peaks, some loss-making ones have fallen in the 50-60 percent range.
Bottom line:
Now that we have gone through some reasons for negative returns in international funds, let us move ahead and address the elephant in the house, what should retail investors do with their global fund exposure post the underperformance?
Investment in international funds should be viewed from a long-term investment approach. Remember, all funds cannot do well at the same time. There will be underperformance in some pockets of your portfolio, but that does not mean you liquidate that part of your portfolio.
Post the US Fed announcement on Wednesday, where a much anticipated 75 bps rate hike to fight inflation took place, the US Fed also hinted towards slowing the pace of the rake hike campaign at some point in time, and investors have regained faith post this. Investors also cheered after US Fed Chair Jerome Powell noted that he does not believe the US economy is in recession.
However, if you are worried about existing holdings in international funds, hold on to that thought of hitting the panic button and rushing to exit. Look at the allocations; reducing allocation in international funds might make more sense if you have anything beyond 25% out of the entire portfolio.
With SEBI removing bans on investment in international funds after breaching an overall limit of USD 7 bn, novice investors can allocate 10-15% of their investment in international funds depending on their risk profile and time horizon. A focused approach on developed and emerging markets, while looking at regions like US tech and European markets through passively managed strategy, can work well in the coming days.
One should not consider international funds as a part of their core portfolio; it is meant for a specific allocation in your satellite portfolio with changing preferences to different regions and economies.
Reach out to us for any of your queries; we will be happy to help!
Till then, happy investing.
