ET:Rupee falls over 16% since July against dollar, trips foreign funds; hedging in focus
HONG KONG: Foreign mutual funds that invest in Indian shares are trailing onshore rivals by the widest margin in 13 years due to a dive in the rupee, raising the risk of sharp investor withdrawals unless funds embrace unfamiliar and costly currency risk hedging.
The contrast in performance highlights how foreign funds - there are nearly 180 of them collectively managing some $32 billion - have been caught off-guard by volatility in the Indian currency, and many may now have to take on hedging mechanisms.
"The philosophy for most offshore funds that run dedicated India strategies is that they want to take an explicit call on India as a whole," said Binay Chandgothia, a managing director at Principal Global Investors that manages over $200 billion.
"Hedging is not a huge focus for a lot of them." The rupee has dropped more than 16 percent against the US dollar since July, making it Asia's worst performing currency this year. That has piled on the agony for foreign investors already suffering from a near-25 percent slide in the benchmark share index this year.
India-focused foreign stock mutual funds have seen cumulative outflows worth $4.5 billion this year to end-November, according to data from industry tracker Lipper. Their Indian peers have seen net inflows worth $1.34 billion, data from the Association of Mutual Funds in India showed.
Offshore equity funds lost an average 31.4 percent in January-November, 11.6 percentage points more than the average loss in funds based in India, Lipper data showed. Onshore funds manage $37 billion in assets.
The last time foreign funds underperformed by more was in 1998 when they gained 4.3 percent on average, but lagged the 17.7 percent average return of onshore equity mutual funds.
LOSERS & FEW WINNERS
Barring two funds betting on the consumer goods sector and two arbitrage funds run by the fund unit of Goldman Sachs in India, all equity funds have posted negative returns in 2011.
Funds that focus on infrastructure lead the pack of losers. The worst performers to end-November are HSBC India Infrastructure Equity and OkasanAM India Infra Related Equity, down 59 percent and 45 percent, respectively. Both funds measure their performance in Japanese yen, which has strengthened more than a fifth against the rupee, adding to the losses from falling infrastructure shares in Asia's worst-performing stock market this year.
Japan-based, India-focused funds manage $5.5 billion, the highest among the offshore funds. Their return divergence with onshore peers was 15.6 percentage points, Lipper data showed.
