Global Equity Portfolio for Indians?

Indians are generally too poor to invest in equity marketsin any significant measure.. But there are large number of rich enough Indians who could have, if they were not scared or  if they cared not to remain ill-informed, invested in a portfolio of shares of foreiogn companies by taking advantage of the $200,000 per annum per resident Indian ceiling of investing in foreign equity markets.  The number of such wealthy persons. By doing that they could have both reduced risk as also earned higher return, according to Sowmdeb Sen, my son who has been in the US since 1998. This is what he has to say:

Global Opportunities for Indian Portfolio Investors
"Early in this decade the Indian regulatory authorities had allowed Indian investors to invest in foreign financial markets through mutual funds and also directly up to $200,000 every year. It does not appear however that the Indian investors have been much enthused: the amount of investment by resident Indians in financial markets abroad has been insignificant even after taking into account investment in convertible bonds of Indian companies listed/ traded abroad. Indian portfolio investors may not have as yet been able to appreciate the potential of higher return and risk reduction through investing in foreign equity markets. However, with hindsight, it seems that they could have benefited by taking opportunities for higher risk-adjusted returns in selected Emerging and Frontier markets. Just to illustrate with a few countries like Russia, Brazil, Columbia and China: if an Indian investor had 10 years ago invested in a portfolio of the stock market indices of these countries and India with equal weights (20% for each country), the return after adjusting for currency depreciation/ appreciation, would have 14.5% as against the Indian market return of 11%. If the investor had built such a portfolio five years back, the return would have been close to 22% as against the Indian market return of 21%.

If we were to replace Russia with either Peru or Indonesia, then the new strategy would have worked for 1, 3, 5 and 10 year periods and with better excess returns than that of the strategy of equally weghted porfolio of four BRIC countries and Columbia. The conclusion is that over the last 10, 5. 3 and 1 year periods, Indian investors could have had better returns by investing in an appropriately diversified portfolio spread in the five/six different emerging equity markets including India rather than investing entirely or largely in India.
Would such a diversification of investment portfolio have exposed the Indian investor to higher risk for getting the higher return? This apprehension is not justified by the historical data. In three of the four foreign markets mentioned above, returns per unit of risk were not lower than that in India - both for the 5 year and 10 year period.

The conclusions above are based on MSCI emerging market indices: but they should hold true using cross-country indices like the BSE Sensex, Brazil Bovespa and the likes because of the correlation between such domestic market indices and the corresponding MSCI indices. It is also to be recognized that a mere passively diversified emerging market index portfolio may not yield a higher risk-adjusted return sought by the Indian investors: the overall emerging market MSCI index which comprises of more than 20 countries returned 14% and 8% in the 5 year and 10 year time-frame respectively. The choice of markets and their weights need to be dynamically set for such diversified international portfolios to meet the return and risk objectives of the Indian investor. What has happened in the past may not necessarily repeat in the future. Skilled investment management and advice backed by global experience will help Indian investors to exploit the opportunities of enhancing portfolio return adjusted for both market and currency risks through appropriate diversification of equity investment portfolio.

It is nearly two decades since India embarked on the path of economic and associated financial liberalization. The country’s oldest fund had in the early 1990s proposed to invest a part of its largest scheme (about Rs35, 000 Crore-asset size then) to invest in global markets but failed to secure regulatory nod. In the late 1990s, based on a committee report, mutual funds in India were allowed to lunch funds that could invest abroad. Currently, however, only a few Indian mutual funds manage offer foreign market equity exposure: Templeton Indian Equity Income fund, Birla Sun life International Equity, Sundaram BNP Global Advantage, Principal Global Opportunities Fund - they manage about Rs 2,000 crores (negligible share in equity assets of Indian mutual funds). These funds are about two - five years in operation: the size of the oldest has grown from Rs 50 crore in 2004 to Rs 160 crore currently. Only one funds is 100% internationally invested with more than 50% of assets in mature developed markets like US, Germany and Switzerland where the returns are lower. Other funds are more than 50% invested in Indian equity and some of them are weighted more towards Asian stock markets. So the returns yielded by these have been inferior to the strategy of being equally invested in the five different markets. The best among these funds have given a much higher return by taking exposure in some of the emerging markets mentioned earlier.

Indian investment management industry may benefit from strategic initiatives to explore more actively the scope of enhancing the risk-adjusted return on the globally-invested equity portfolios of the Indian investors. The next decade may mark the rise of India as a source of portfolio investment in global equity markets even as foreign portfolio investments continue to claim a significant share in India stock markets."

Sowmdeb, Indians do not get so easily enthused to get out of their comfort of being scared of investing abroad. Indian equity is what they can at best trust.