Scouting for value in a bull market
The rupee’s nosedive against the dollar in recent months has pushed many international focused funds to the top of the mutual fund performance chart. Funds that focus on the US market have topped the charts in the last one year, thanks to the currency effect, besides improved earnings of companies there.
It is therefore not surprising that JP Morgan AMC has chosen to launch a fund-of-fund focused on the US markets. Called JP Morgan US Value Equity Offshore Fund, the feeder fund (fund-of-fund) will in turn invest in JP Morgan funds – US Value Fund.
The US market
The US market has clearly been going through a bull market rally if returns over the last 3 years are anything to go by. And the party continues with the S&P 500 gaining 20% (in dollar terms) thus far in 2013. This is supposed to be the best first-half (of a calendar year) rally by the index since 1998.
But then, that also makes a case for discreet investing as valuations of many key indices no longer look cheap. Which is why, a value investing proposition may be a prudent strategy at this stage, although opportunities may not be too many at this point. According to reports from Bloomberg, more than 90% of the S&P 500 stocks were trading above their 200-day rolling averages last week, suggesting the kind of broad-based rally that stocks witnessed.
Nevertheless, going by the number of large-sized companies (in the US) with sustainable earnings and high dividend yield, value investing certainly offers better scope in a developed market like the US than in an emerging market such as India.
The US Value Fund, which is the parent fund, follows value-based investing. That means metrics such as price-to-earnings ratio, price-to-book ratio, free cash flow yield and a high return on invested capital will matter in stock decisions.
The fund is indexed against the Russell 1000 Value index. Now, this index measures the performance of the large-cap value segment of the US equity universe that reflects value characteristics.
The Rusell 1000 index has been on a roll for the past 3 years, with a compounded annual return of 18.7% annually, a tad higher than the broad index Russell 3000. At a price to book ratio of 1.67 times and dividend yield of 2.39, this index does hold some value characteristics. Just to put this in perspective the BSE 100 has a price to book of 2.66 times and a dividend yield of 1.46.
The US Value Fund had a good run in the past one year ending June 30 2013, delivering 22% in dollar terms (that’s 31% in rupee terms). The fund returned 7% annually (10% annually in rupee currency) since inception in September 2004 till June 2013. Exxon Mobil, Wells Fargo, Chevron and AT&T are some of the giant corporations that the fund holds. The fund is managed since its inception by Jonathan Simon.
There are currently 2 funds (from the Franklin Templeton and ICICI Prudential houses) and 1 ETF (from Motilal Oswal) in India that invest in US Equities. Read our article on US-focused funds for more information.
The divergence in the rupee and dollar returns (9 percentage-point difference) of JP Morgan US Value is evidence to the kind of influence that currency return has on international funds. A depreciating rupee props up international fund returns.
Investors may note that a reversal of the rupee against the dollar from the current levels could also adversely affect fund returns. Hence, international funds should not account for a chunk of your portfolio. Their exposure should be restricted to about 10-15% of one’s portfolio and that too in a phased manner.
Funds that invest in international securities will be treated like debt funds for tax purpose. This will be the case with JP Morgan US Value Equity Offshore Fund as well.
The new fund offer closes on July 31.
Investors may note that this is a review of the NFO and should not be construed as a recommendation.