Blog

A Sensible Guide to Global Investing

First, let's understand why you should, at all, consider investing part of your portfolio overseas. Let me tell you a story from history that I lived through, but many of you may not be familiar with - having been too young at that time.

Almost 25 years ago, in 1997-98, every South East Asian Market from Taiwan to Thailand to South Korea to Indonesia fell between 50 to 90% in US Dollar terms in a single year. A phase that went down in history as the Asian Crisis.

The thing to remember is that these were not no-hoper, basket case economies. These were the Asian Tigers. They were inspirational and even India wanted to be an Asian Tiger. Yet, their currency and stock markets collapsed.

More recently, we have seen a similar carnage in Russia, Sri Lanka and to an extent even in Western Europe.

Even when there is no crisis, single stock markets can deliver poor performance for very long. Japan has not reached its 1980s high even after 3 decades. The mighty NASDAQ did not take out its 2000 high till 2015.

Yet, investors all over the world continue to have a disproportionate allocation to their home markets which is both a sub optimal, as well as risky, strategy.

The Indian stock market accounts for approximately 3% of the world's market capitalisation. Why should you have 95% or 100% of your investment portfolio invested only in India, ignoring the rest of the world?

In general, investors should look at diversifying outside home markets as only home market exposure exposes you to SCCARs (Single Country Single Currency Single Asset Risk) which can be a huge blow at times.

Since most of your returns are decided by Asset Allocation, it is imperative to have diversification across geographies and asset classes.

Even if there are no disasters, the risk is real...even in India.

In the mid-80s, when I started working, the US Dollar was Rs.12. Today it is Rs.82+! So, that has been an 85-86% loss in the value of the Indian Rupee over the course of a career.

Earlier, of course, there was no way for an Indian resident investor to get a truly Global exposure. This is no longer the case.

For Indian Investors, there are a few ways to get Global exposure: through the Liberalised Remittance Scheme (LRS) of the RBI as well as Domestic Instruments.

Under this scheme, an Indian resident can invest up to USD 250,000 (about Rs.2 crores) per year per person globally. This is a fairly generous limit.

However, since Indian Investors have historically not been used to investing overseas, there is still considerable confusion and uncertainty about the optimal route to take for Global Investments.

Let us look at some ways to make these Investments and the pros and cons of each:

1.   Mutual Fund offerings of Indian houses where all or part of the investments are made in Global ETFs, funds or stocks. These are domestic instruments and don't even use up your LRS limit. However, these have a few constraints, including an overall limit by the RBI on how much can be invested by the entire Mutual Fund Industry, globally.

The other drawback is that it adds another layer of costs & charges by the Domestic Fund house for no additional benefit, whereas you still continue to pay what the overseas ETF manager or fund house charges.

Also, there is no accountability, as the domestic Asset Management Company (AMC) is just a pass through entity. Consequently, it will not be liable to give any explanations for the performance, or lack thereof, of the fund.

The other constraint which is not a built in one, but simply a result of the way things are done is that most Indian offerings are oriented towards only one or two geographies, usually the US and sometimes the China region. They are not truly Global in nature.

A recent example is that a number of NASDAQ offerings came up in 2021 when the NASDAQ was booming, which have since lost substantial money for the investors.

2.   Under the LRS scheme, the Indian investor can also directly buy both stocks and mutual fund / ETFs abroad with some constraints like no leverage or derivative positions.

These can be used to buy any ETF or funds. These can include those in Equity Markets as well as those in Fixed Income, Commodities etc.  Again, investors looking at these should look beyond only the well-known one or two US indices.

Most of your returns in an investment portfolio come from Asset Allocation and the optimum Asset Allocation does not remain static over a period of time. 

Various countries, geographies, asset classes, sectors etc. go ‘out of favour’ in terms of returns. For example, from 2003 to 2007, US markets were a big underperformer whereas the Emerging Market Index went up over four times - India went up 6 times, Brazil went up 10 times.

Then, from 2010 to 2020, the US was a huge Outperformer whereas Emerging Markets did nothing. 

Therefore, getting locked into one or two ETFs is not a good idea.

3.  The same international brokerage accounts can also be used to buy stocks directly - in at least the Developed Markets. Direct stock purchase access maybe more patchy in Emerging Markets as many brokerage accounts do not provide access to these, although country ETFs are available.

  While it is risky to be locked into certain particular country indexes and ETFs, it is even worse to be locked into certain stocks, especially as the life cycle of businesses is getting shorter and shorter in the Developed World. 

   For context, the NASDAQ did not take out its 2000 high till 2015 and even when it did, the composition was very different! In 2000, Tech majors meant companies like Motorola, Dell, IBM, Cisco etc. whereas now it means a completely different set of stocks. 

  Plus, at various points other asset classes like Commodities, Fixed Income, Precious Metals, Real Estate Investment Trusts (REITs) etc. become more attractive and the Asset Allocation has to be shifted more towards these. In short, what you need is a dynamic and tactical Asset Allocation system.

4.  The learning from all that we have seen about is that an ideal investment portfolio should be diversified across geographies and across asset classes.

  And, even this asset allocation cannot remain static over time. It needs to be managed dynamically and tactically by a Fund Manager or Advisor who really understands Global Markets.

 Normally, access to this type of truly diversified Asset Allocation portfolios is available only to the very wealthy investors, investing over a million dollars each.

However, at First Global we were determined to provide access to this type of investing to smaller Indian investors.

We have managed to structure and offer a truly geographically diversified multi-asset portfolio, called the Global Multi Asset Allocation Portfolio (GMAAP), starting at USD 10,000 which is approximately INR 8 lakh simply as a service to offer this to smaller investors in India. There is also an Equity ONLY variant which is also totally global.

We also have a similar strategy in a FUND format with starts at $100,000.These instruments invest in Developed Markets & Emerging Market Equities, Commodities, Fixed Income of all kinds, Real Estate Investment Trusts etc.

Both of these are truly global, where we invest in anything from Australian mining companies to South African REITs and everything in between. We reallocate and change strategies as the outlook changes because there is always a simultaneous bull market and bear market in the world depending on which asset class and geography you are looking at.

More on that another time.

From the desk of Devina Mehra

Tell Us What You Think:
Accolades & Happiness Under Management

First Global has been widely commended by Global Media. And by thousands of big & small investors worldwide

Subscribe to our fun & thought provoking articles

Contact us on ([email protected]), to get cracking on building serious wealth!

Follow our buzzing social media handles