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Resurgent rupee has feeder funds on edge

The latest reforms rush and improving investor sentiment mean the local currency is flexing its muscles again.

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The latest reforms rush and improving investor sentiment mean the local currency is flexing its muscles again. But those who have their money invested in global markets have a problem at hand. Sachin P Mampatta and Kishor Kadam dissect the issue.

Feeder funds, that is domestic funds that collect money from Indians to invest in global markets, are facing fewer returns even as local markets perk up.

The appreciation in the rupee (51.86 to the US dollar now) after hitting an all-time low of 57.17 in June and the Indian market’s superb rebound in the wake of the government’s efforts to step up reforms have meant that feeder funds are leaving their investors a bit disappointed. Twenty-five out of 30 feeder funds functioning over the September quarter have underperformed the BSE Sensex. While the average 3-month returns of these funds from 14 different asset management companies (AMCs) are 4.14% during the quarter, the BSE Sensex rose 7.65% and the rupee 5%.
Harsha Upadhyaya, head of equities at Kotak Mutual Fund, says rupee fluctuations have contributed to the funds’ underperformance. “The returns for Indian investors are lower when the rupee appreciates since the assets for most of these funds are in dollars.”

Firms such as Kotak and ING operate feeder funds in India. Typically, a feeder fund routes capital collected from Indian investors to a global fund which then invests it in overseas equities (say, stocks of Latin American companies or those related to agriculture like tractor firms and fertiliser companies). Since these assets are usually held in dollars, rupee appreciation impacts returns negatively.

K Ramanathan, chief investment officer at ING Investment Management India, said: “India has been a much better-performing market due to reforms. The rupee has also appreciated in recent times which has affected returns.”

Since mid-September, the government has brought down fuel subsidies and allowed foreign entities to buy strategic stakes in retail, aviation, power exchanges and broadcast companies. It has also incentivised retail investment in the equity market and given tax breaks for companies looking to access foreign capital.

The Sensex rose 7.65% to close the September quarter at 18762.74, which has outperformed most Asian markets on a year-to-date basis. The feeder funds which outperformed the Sensex include AIG World Gold Fund, DSP BR World Gold Fund, Birla Sun Life CEF - Global PMP, Birla Sun Life International Equity - Plan B and Templeton India Equity Income Fund. They were all up between 11.3% to 17.3%.

The first three of them benefited from their exposure to gold mining companies, which have risen on the back of a stronger yellow metal. The remaining two have a mandate for domestic market exposure as well, which helped mitigate the currency risk faced by other feeder funds that have only global exposure.

Meanwhile, the rupee may be all set to strengthen further, adding to headwinds for feeder funds. A report from global financial services firm Goldman Sachs noted that an improvement in the current account deficit (CAD) and the balance of payments are likely to result in further strengthening of the rupee. “We remain positive on the INR due to an improving CAD and greater capital inflows, in part due to the recent reform efforts by the government as well as the global easing of liquidity. We maintain our 12-month USD/INR target of 51,” said the September 30 report authored by the firm’s managing director and India economist Tushar Poddar.

Current account deficit is the difference between the value of a country’s exports and its imports while balance of payment is the difference between the money coming in and going out of the country. India’s balance of payments recently turned positive, suggesting that there are more inflows into the country than outflows, an indication that there may be more appreciation in store for the rupee.

Raunak Roongta, an independent financial advisor stated that feeder funds may not be the best place to be in even from the point of view of diversification. “The track record of feeder funds has not been great except in times of rupee appreciation. Investors should exit if they see any weakening in the rupee,” he said.
 

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