US-focused funds can deliver despite long bull run, say analysts

Invest with at least a seven-year horizon, via SIP, and limit exposure to 15%

Equity markets both in India and the United States (US) are on a roll. While in India the BSE Sensex and the Nifty50 crossed 54,000 and 16,000 points, respectively, for the first time this week, in the US the S&P 500 closed at a record high of 4,222, while the Dow Jones Industrial Average (DJIA) crossed 35,000 for the first time.
 
US-focused funds have performed very well over the past several years (see table): Average returns over the past seven years stand at 17.8 per cent annualis­ed. In June 2016, there were only six of these funds with asset under management (AUM) of Rs 1,157.9 crore. By June 2021, their count had swollen to 12 with AUM of Rs 19,086.7 crore. IDFC US Equity Fund-of-Fund (FoF) is the latest fund to be launched in this space. Its ongoing new fund offer closes on August 12.
 
Diversification benefit
 
The key reason for investing in a US fund should be geographical diversification. “Different markets have different return drivers and are at different stages of growth. US-focused funds offer good diversification beyond the domestic equity market,” says Bhavana Acharya, co-founder, PrimeInvestor.in.
 
While the trend towards international diversification has begun in India, there is still a long way to go. According to Vishal Kapoor, chief executive officer (CEO), IDFC Asset Management Company (AMC). “International diversification by Indian investors through funds is under 2 per cent of total equity fund investments.”
 
Different themes
 
Developed markets like the US offer Indian investors the opportunity to invest in global businesses like Amazon, Google, Adobe, and Facebook that benefit from global growth. If you invest in a portfolio of US equities, for instance, the JP Morgan US Growth Fund that IDFC’s fund-of-fund will invest in, nearly 41 per cent of the revenue of these companies come from non-US markets.
 
Also, an Indian investor gets exposure to emerging themes such as artificial intelligence, machine learning, robotics, and pharmaceutical research (for new molecules) that are not available in India.

Low correlation
 
US and Indian equities also have low correlation. “Data on correlation shows that US and Indian equities have moved differently across several periods, thereby offering effective diversification and adding greater stability to a portfolio consisting of investments in both these geographies,” says Kapoor.
 
Indian investors also benefit from currency movements. “Low correlation between the two markets alongside rupee depreciation against the dollar can help Indian investors reap rich returns,” says S Sridharan, founder, Wealth Ladder Direct.
 
Can US performance continue?
 
After correcting in March 2020, US equities have also bounced back. Valuations are not cheap. This has given rise to doubts over whether this market can continue to perform. “Prima facie, valuations in the US do look high. However, when we look at the price-to-earnings (P/E) ratio and earnings of the S&P 500, we notice that the top 10 stocks have significantly driven up overall valuation levels. The remaining 490 stocks are more reasonably valued and, therefore, offer long-term potential,” says Kapoor.
 
This market could continue to perform. “There are stocks with huge growth potential within the broader market that have not participated in the rally yet,” adds Sridharan.
 
What should you do?
 
Invest in a US fund for the long haul. “Investors must invest for at least five-seven years,” says Acharya. Take the systematic investment plan (SIP) route to average out acquisition cost. Also, do not get carried away by the current high returns and have more modest expectations from the future. “Limit your allocation to 15 per cent of your equity portfolio,” adds Acharya.
 
Investors not keen on betting on an actively managed fund may invest in a US-focused exchange-traded fund or index fund. Passive funds based on both the Nasdaq 100 and S&P 500 are available.