Volatility likely in Europe-focused funds

Stay invested if these are part of your portfolio diversification, as most have exposure to fundamentally strong companies

Returns from international funds have been muted for some time, given the weakness in the international equity markets. But considering the recent volatility in European equity and bond markets and the euro, what is the impact on Europe-focused funds? Also, Greece, a member of the European Union, has defaulted on loan repayment to the International Monetary Fund (IMF). Is this likely to impact other European economies? Should you redeem your holdings in Europe- specific funds and shift to US-focused funds,  are relatively more stable? 

Vidya Bala, head-mutual fund research, FundsIndia.com, said investors must look at specific countries and sectors that these funds have exposure to. “A majority of these funds have major exposure to countries like the UK, France and Germany and some emerging European markets. They have exposure to sectors such as pharma and consumer discretionary goods, which are quite robust now. While they also have some exposure to banks and financial institutions, which, in turn, have exposure to Greece, that exposure is not alarmingly huge in their overall portfolio,'' she said.

That is why it makes sense to invest in mutual funds, as fund managers will take care by moving out of such banks and financial institutions, she added.

According to data from ValueResearch, returns from two of the four Europe-focused funds have been negative in the one-year period. In the other two funds, the returns are less than 1.5 per cent. Most of the companies these funds have an exposure to are countries like Germany, France and the UK. They are fundamentally strong and their business models are diversified. About half of their revenues are from non-European markets such as USA and emerging markets, says Supreet Bhan, executive director, head-retail sales, JPMorgan Asset Management.

Besides, the euro has fallen against the dollar and other currencies, which will add to the revenues of European countries as they can earn more from their exports. Due to these reasons, the medium to long-term impact on European companies will not be hit by the Greece volatility, even if there could be some period of uncertainty.

“Our outlook on the earnings of European companies   continues to be strong, as the volatility will not be very severe,” Bhan says.

Unless you have too much exposure to European funds, there is no need to exit these. If part of your portfolio diversification, you can to stay invested. Even if US funds are stable now, once the rupee appreciates, their returns will see a decline, too, points out Bala.

Going ahead, European companies will see higher growth than US companies because the former have improved their efficiencies and margins over the last few years. So, while US-focused funds are less volatile, expectation of returns from those funds are muted as compared to European funds, Bhan said.

“While investing in international funds, ensure that you take exposure to markets that are not highly co-related to India. Typically, those are emerging markets or Asian markets. Traditionally US and European markets don't have very high co-relation to Indian markets,” Bala added.

Investors comfortable holding on to European equities could continue to maintain their exposure to the region, but should take profits if markets and valuations continue to tread higher, Renu Pothen, research head, Fundsupermart.com. “If Greece defaults and leaves the euro zone, short-term volatility amid knee-jerk reactions could be expected. But we do not believe the departure will make a material impact to Europe,” she said.

Name of Fund	One-year return (%)	Assets Under Management (Rs crore)
DWS Euroland Offshore Fund	-0.7	34
Franklin India Feeder - Franklin European Growth Fund	-8.63	51
JP Morgan Europe Dynamic Equity Offshore Fund - Regular Plan	1.23	155
Religare Invesco Pan European Equity Fund - Regular Plan	0.93	89