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And Now, NFOs With Track Records

It’s difficult to judge whether a NFO will do well since it has no history. But here are the exceptions

As I wrote last week, the Indian mutual fund industry has unleashed a flurry of new funds (NFOs) before entry load gets abolished on August 1. Most of these NFOs are of plain vanilla funds that have been given a dash of some flavour or the other as a marketing aid. However, there are a couple of funds that are genuinely different and do have a reasonable claim to be considered by the thoughtful investor. Let’s see whether such a claim is justifiable.

These funds are DSP BlackRock’s World Energy Fund and JP Morgan’s Greater China Fund. Both funds are similar to the extent that they will invest in foreign equity and both will make these investments by being feeder funds of existing mutual funds (MFs) that the fund company’s foreign parent is already running. This makes for an interesting characteristic — despite being new, these funds have a track record because the master fund already exists.

Anyhow, let’s take a look at the funds themselves. The World Energy Fund is basically a play on oil prices. It’s a fund-of-funds that is based on two foreign funds. It will keep between 50 and 100 per cent of its assets invested in BlackRock Global’s World Energy Fund, which invests in conventional oil, gas and related companies. It could also invest up to 30 per cent in BlackRock Global’s New Energy Fund, which is a sort of a green energy fund. The New Energy Fund invests in alternate energy. These could be companies which are directly involved in energy or in an energy conservation-related business.

Essentially, this fund is a play on oil prices. If global oil demand outstrips supply in the coming years then conventional oil companies will be good investments and so will alternate energy companies. Its interesting that despite several of India’s large oil companies being listed, an equivalent investment is not possible in the Indian stock markets. Because of our government’s addiction to oil subsidies, Indian oil companies lose money when prices rise, unlike the rest of the world where high prices are good for oil companies.

Investing in a fund like this could be a sort of a personal hedge against high oil prices.

The other international fund that is interesting is JP Morgan’s Greater China Fund. As the name indicates, this is a general equity fund that will invest in stocks that are related to the greater China region. By the way, ‘Greater China’ is a fancy term for China, Taiwan and Hong Kong, though I’m not sure how the Taiwanese like being called that — they’ve always claimed that they are The China.

Anyhow, it makes a certain sense for an Indian investor to diversify globally with a small amount of his portfolio into opportunities like these ones. Having five or ten per cent of one’s equity exposure to funds like these is likely to be useful. Of course, this brings up the age old question of how much decision-making should a MF investor be taking anyway.

I have always been strongly opposed to the idea of any kind of specialised, thematic or sector fund. MF investors need to be hands off, apart from having to choose a general, diversified fund. Everything else should be done by the fund manager. At most, funds should characterise themselves as aggressive or conservative to enable an investor to choose something which matches his own mental make-up. Beyond that, it should be up to the fund manager to decide on India or China or whatever.

Unfortunately, such options are not easily available, but wise investors should certainly keep their choices as plain as possible.