The scale of business opportunities outside India is so huge that equity investors cannot ignore it anymore
15-Jan-2018 •Dhirendra Kumar
During the 70s and 80s, the American investment manager Peter Lynch, while managing the Fidelity Magellan mutual fund in the US, generated an annualised return of 29.4 per cent, making it the best performing mutual fund in the world for more than a decade. This performance made Lynch a legend in the world of investments, but what truly cemented his role for posterity was the books and articles he wrote about equity investing.
After all, the money he made for Magellan investors two decades benefited only those investors. His writings, on the other hand, benefited many more, and continue to do so even now. Certainly, my own education in equity investing owes a great deal to an early introduction to Peter Lynch's ideas, as does the design and conceptualisation of the Value Research Stock Advisor service.
Peter Lynch's classic, of course, is the great book One up on Wall Street. Along with his other books, Beating the Street, and Learn to Earn, and his various articles, Lynch should be read by every investor. As you can probably tell from the titles alone, Lynch firmly believes that ordinary individual investors, by using the information they have access to in their daily lives, can do better than professional investors and fund managers. For a fund manager to espouse this idea is remarkable.
However, an Indian investor trying to do this nowadays faces a problem. Far too many of the businesses that can be identified in this way may actually not be listed in India. Many of them are private companies in India, with the business here being eventually owned by a foreign company. So many of your daily activities involve companies listed abroad. You shop at Amazon, you search the world with Google products and Android phones, drive a Honda car, talk on a Samsung or Apple phone, work on a Dell computer, and waste time on Facebook and Twitter. There are many other examples, and the list continues.
Following the Lynchian principle, as an investor, if you could make some observation and figure out that X foreign company's stock is worth buying. In fact, compared to large Indian companies, the humongous size and global footprint of these businesses means that the size of the opportunity is so much larger. Amazon does not have a dominant market share of e-commerce anywhere in the world and yet it's market cap is about 10X of Reliance Industries. Alphabet (Google's parent company) has a market cap that's even higher, and Apple is still higher.
And yet, few Indian investors invest in foreign stocks. You did know that you can do that, right? Only a relatively small number seem to do so. And yet, this has now been possible for almost fifteen years.
Whether you look upon it as a farming of Lynchian opportunities or simply as geographical diversification, it is worthwhile to invest some money outside India. In fact, this was proven during the period immediately following the 2007-08 financial crisis. From the end of 2007 to the end of 2013, the BSE Sensex generated total returns of 4 per cent, while a rupee investment in the US markets would have doubled your money.
All in all, if equities are a part of your long-term investments, then a certain part of it (perhaps 10-20 per cent) should be invested globally. You can invest directly, or take the mutual fund route, for which there are a number of Indian mutual funds available. However, you should know that while equity fund returns from investments of over one year are tax free, this tax break is only available to those funds where at least 65 percent of the money is invested in Indian equities. This gives an advantage to those mutual funds that invest in Indian equities, but allocate a small proportion externally. This also frees the saver from having to take the decision of how much to invest abroad.
All in all, I would strongly recommend global diversification for all Indian equity investors. It may or may not turn out to be a good idea in any particular time frame, but overall, it will be a positive factor in your investment portfolio.