Where's Santa? Desi MFs betting on US stocks face worst quarterly rout

With US stocks suffering the worst week in a decade, Indian investors in funds that target American stocks have been left high and dry with 17-23% decline in the last three months. The worst-ever quarterly losses in US-focused equity funds cut across fund houses, providing little in form of respite or geographical diversification. Ironically, India's domestic markets are still holding on to gains amid a sharp decline in the US markets that have long given up all their 2018 gains.

After multiple years of gains, US investors are fleeing their own stocks, as concerns about corporate profits, and slowing economic growth take centre stage. Earlier this week, the US Federal Reserve lifted the interest rate and signalled that it would continue to rise next year, albeit at a slower pace. This rattled US markets.

With the US Federal Reserve hiking interest rates there, markets have turned topsy-turvy. The biggest US fund, Rs 700-crore Franklin India Feeder Franklin US Opportunities Fund is down 22.85% in the last three months. The fund's biggest holdings are in Amazon.com (down 28%), MasterCard (down 21%), Microsoft (down 14%), Apple (down 31%) and Google's parent Alphabet (down 16%).

Tech stocks, namely FANG - Facebook, Amazon, Netflix and Google - have been troublesome picks for many US funds. DSP US Flexible Equity Fund is down nearly 20% in the last three months, thanks to the declines in its top three holdings namely Apple, Microsoft and Google. The fund's other top holdings include JP Morgan (down 20%) and Bank of America (down 25%). The Motilal Oswal NASDAQ 100 ETF, till a few months ago one of the best performing funds, has lost nearly 21% gains in last three months.

Selling in some of the major technology firms, which led the market's rally previously this year, have really hit funds hard. The bruising falls in tech and financial stocks have contributed to declines in funds. Technology and financials are the two sectors globally very popular with fund managers.

The Kotak US Equity Standard Fund is down 19.7% and Edelweiss US Value Equity Offshore Fund is down 17.3% in the last three months. International funds, like Principal Global Opportunities Fund, with large exposure to US stocks, also seem to have borne the brunt, with the scheme losing 24% value.

"Calendar year 2018 has been extremely volatile with a sharp up move and down move and that is true for US and Indian markets. This is different from the one-way rallies we have seen in the previous years. The time-tested investment strategy has been to put more money during market falls and not get swayed by volatility or sharp market falls. International funds are not for everybody, because of multiple factors," says the investment manager overseeing an US-focused mutual fund.

Ironically, Indian markets, which have a low correlation with overseas markets, have proven to be a better investment destination. India's Sensex is still up 5% for the year, at a time when US markets are staring at a 10% loss. "In fact, India is the only economy that, according to BNPP's global economics team, is likely to buck the 'synchronised slowdown' trend in 2019 and 2020," says Manishi Raychadhuri, head of equity research, BNP Paribas APAC.

In comparison to US funds, domestic-focused MFs in India are down only 1-3% average in the last three months.