I made a presentation at the Morningstar conference in 2019 which created quite a ripple amongst investors.

The theme of my presentation was that Indian equities had been an extremely disappointing asset class over the last 10 5, 3 and 1 year time frames.

Starting from 2010, the Dollar index (Dollex) has given negative Returns 6% till date.

And the data for 2019 has been eye-popping. 

Take a Look at this table of 2019 stock market performances in US dollar terms.


2019 in USD











































Even a so-called basket case market like Turkey did better than India. 

Leave equities: even Global fixed income gave far higher returns than Indian equities!

These data really set the cat among the pigeons. Implanted the seed in the minds of emerging market investors including Indian investors that having a single country, single currency, single asset risk (SCCARS) was simply not wise for long term wealth building with scientific risk management. 

And then many people then rushed headlong into diversifying there Holdings internationally.

All with disastrous consequences!

Global markets, US in particular, in fact fell more than the Indian markets. 

So the question on everybody is mind is: where did they go wrong in their quest to diversify globally? 

The answers to this are not easy.

Let us start with the simpler answer: International diversification is a very very difficult, complicated endeavor, and practically, most ways to do this are sub optimal, because in reality, they do not give any meaningful diversification beyond just a currency factor. 

Don't go for the easy solutions here because there are no easy solutions.

The complicated part is how should therefore international diversification of investments be done?

First let us look at what are the typical routes available for Indian investors to invest globally.

Feeder Funds

The simplest method is to buy Feeder funds of various international funds, available via local fund houses.  

These funds give you exposure usually to single markets or even to single narrow indexes/ sectors such as NASDAQ/ Technology.

Problems with Feeder Funds

They do not really give you much diversification because they give one additional market/ region, generally speaking. This does not solve the problem of getting away from single SCCARS. 

The feeder funds are also fairly costly with their expense ratios ranging between 2 and 3%. This, frankly, is absolutely unacceptably high.

These expense ratios are so high because the Domestic fund houses that offers these feeder funds get an additional layer of Management field for doing precisely nothing! Talk about getting a free ride on investor money!

Further, there is no accountability that the domestic fund house provider of the feeder fund has towards investors and investment performance, since the Investment Management function has been outsourced to someone sitting in New York or London. 

Who do you go and catch if there is a problem? Because the domestic fund house that is providing this feeder fund is nothing more than a glorified intermediary with zero knowledge of the market in which the feeder fund is going to be investing into. 

Buying International Exchange Traded Funds (ETFs)

This is the second method in which a domestic investor can get International exposure.

The only thing that these instruments have going for them is that they are lower cost as compared to feeder funds.

However how does the investor decide which ETF to buy? Which markets to invest in through these ETFs? How to balance risk and reward? How to decide on what is a perfect portfolio construction of these instruments, across markets and asset classes?

ETFs simply don't work for all but the most sophisticated investors.

How to do international diversification, the Right Way

None of the methods outlined above give proper International diversification because they have their own unique problems.

The holy grail of investing is correct top-down asset allocation. Without getting that right, just going and buying a feeder fund or exchange traded fund will give sub optimal returns over the long run because there is no single way that this feeder  funds or ETFs can give you Global top-down asset allocation in a tactical , dynamic manner.

Asset classes go in and out of favour.

Nothing is permanent about any particular asset class.

For example emerging markets did very well from 2004 to 2007.

Therefore all feeder funds guided you to invest in emerging market funds.

Results were disastrous from 2008 onwards for Emerging Market equities.

And just in the last 2 months one can see how disastrous going long on US technology/ NASDAQ, has been where most stocks are down 40-50% within one month.

The right way to do Global diversification is to get your top-down asset allocation right and towards this, the fund manager that you select must be capable of giving you this advice and managing your investments on this basis so that you have a well constructed portfolio of international equities,  International fixed income as well as commodities.

Even more importantly, your investment manager must have the skills to manage these allocations dynamically.

If you do not get proper top-down asset allocation right, you are destined to suffer the vagaries of markets. 

And last but most important, get expertise that is available locally for you to discuss with and plan, rather than the investment Management process being outsourced to some faceless set of people sitting thousands of miles away.

From the desk of

Devina Mehra

Trusted Financial Advisors to some of the world's largest Funds, Institutions & Family Offices, for 30 years

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(A version of this article was first published in Moneycontrol)

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