Rising rupee lowers offshore fund returns

The recent strength in the rupee against the dollar has affected the performance of the schemes of domestic mutual funds that invest in international markets.

This category was among the best performers in 2013 and saw assets grow 50 per cent in the past year.

Of the 70 international feeder funds, more than half have made losses in 2014.

Some of these funds have fallen by as much as 13 per cent in three months, according to data from Value Research, an online fund tracker.

Since the year’s beginning, emerging market equities have been under pressure.

The rupee, during the period, has risen 3.2 per cent.

The BSE Sensex in these months has returned a little over six per cent.

“The main reason for the underperformance of these funds has been the appreciation in the currency.

“If the rupee strengthens further, this could continue,” said Surajit Misra, executive vice- president & national head (mutual funds), Bajaj Capital.

Most of the underperformers have a focus on EM equities, mainly those of China and Latin America, struggling since the start of 2014.

“The underperformance is also due to market-specific reasons. Most of the EM equities have been under pressure since the beginning of the year, after the US Fed decided to taper its stimulus programme,” said Dhirendra Kumar, chief executive, Value Research.

EM equities have been under pressure after the US Federal Reserve tapered its stimulus package by $10 billion a month.

This led to flight of capital from Asian stocks, which had rallied on the back of the continued liquidity provided by the package, the third quantitative easing (‘QE3’).

Yet, fund managers and experts have not given up on these funds.

“From a diversification point of view, you have to be in these funds. Yes, EMs have been beaten down badly.

“But we expect some sort of recovery, as valuations are very cheap,” said Gopal Agrawal, chief investment officer and head (equity), Mirae Asset Global Investments.

While the rupee remains an immediate concern, with experts expecting it to rise to around 58 to a dollar in the short term, analysts said it could come back to 60-levels after the elections.

“So, investors should remain invested in these funds,” said Kumar.

The underperformance of EM equities was accompanied by a turnaround in US equities.

However, the currency appreciation negated the effect, lowering returns on these funds, analysts said.

Offshore funds had been the best performing last year, as Indian equities weakened on the back of a depreciating rupee and poor growth prospects.

According to data from Value Research these funds outperformed the Indian markets and had given returns as high as 44 per cent.

The rupee in 2013 declined a little over 10 per cent and Indian equities were among the worst performing markets.

This led to an increase in demand for offshore funds from investors, as confidence in Indian markets waned.

The assets under management under these schemes in the past one year rose 54 per cent.

However, the underperformance this year has not been accompanied by a simultaneous fall in the AUM of these funds.

The total AUM had grown by a quarter to about Rs 3,200 crore (Rs 32 billion) in February 2014 from Rs 2,539 crore (Rs 25.39 billion) as at end December 2013.

Fund house officials said new offshore fund offerings focused on European equities had pushed up the AUM of this category.