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Offshore funds are typically structured in order to take economic advantage present in respective foreign nation(s). The idea behind is to de-risk or reduce macroeconomic risks prevalent in the domestic economy by taking exposure to the economic advantages offered by other economies; which may pose to offer high growth potential, stability, political security and other fundamental strengths. However, offshore funds are vulnerable to a number of risks as well due to their overseas investments. Some of the inherent risks faced by offshore funds are country-specific macroeconomic risks, currency risk, taxation laws, regulation risks (affecting investment decisions), etc. Hence extensive cross-border research – both economic and political research needs to undertaken before committing any investments in such funds.
Franklin Asian Equity Fund (FAEF) is one such open-ended offshore equity fund from the stable of Franklin Templeton Mutual Fund, which follows a blend style of investing. FAEF is primarily mandated to invest in equities and equity-related securities of Asian companies (excluding Japan), along with debt and money market instruments. Launched in January 2008, the fund has completed a little over 3 years of existence.
Investment Objective and Proposition
The fund's primary investment objective is "to provide medium to long term appreciation through investments primarily in Asian companies / sectors (excluding Japan) with long term potential across market capitalisation." The fund is mandated to invest 50% - 100% of its total assets in equity and equity-related securities of foreign companies, upto 40% in equity and equity-related securities of Indian companies and upto 30% in domestic debt and money market instruments, to manage its liquidity requirements.
Over the past one year, FAEF's exposure to overseas stocks has been in the range of 74% - 86%, while its exposure to domestic (Indian) stocks has been in the range of 7% - 22%. Thus FAEF's tilt towards overseas equities justifies it being an offshore fund. The chart below as well as the portfolio turnover ratio of 61% reveals that FAEF has been quite consistent with its cross- border investments. This in a way also displays the fund manager's 'invest and hold strategy' while undertaking investment decisions.
Equity Portfolio
| Holdings | Focus | December 2010 | January 2011 | February 2011 | March 2011 | April 2011 |
| Taiwan Semiconductor Manufacturing Co Ltd. | Offshore | 4.7 | 6.9 | 6.8 | 6.8 | 5.9 |
| Hong Kong Exchs & Clearing Ltd. | Offshore | 4.4 | 4.6 | 4.6 | 3.8 | 4.0 |
| China Shenhua Energy (HongKong) | Offshore | 3.1 | 3.1 | 3.4 | 3.8 | 3.7 |
| Parkson Retail Group (HongKong) | Offshore | 3.8 | 4.4 | 3.9 | 3.1 | 3.5 |
| Dairy Farm International Holdings | Offshore | 3.5 | 3.0 | 2.8 | 2.9 | 3.1 |
| Bharti Airtel Ltd. | Domestic | 3.6 | 2.7 | 3.1 | 2.8 | 3.0 |
| China Construction Bank Corp | Offshore | 2.5 | 2.5 | 2.7 | 2.8 | 2.8 |
| Hyundai Motor (South Korea) | Offshore | 3.8 | 2.5 | 2.0 | 2.3 | 2.8 |
| China Overseas Land & Invest Ltd | Offshore | 2.4 | 2.6 | 2.4 | 2.9 | 2.8 |
| Woori Finance Holdings (South Korea) | Offshore | 1.7 | 2.4 | 2.5 | 2.6 | 2.7 |
As indicated by the table above, FAEF's portfolio largely constitutes of Asian economy stocks, barring one Indian company – Bharti Airtel Ltd. Moreover, the latest portfolio of stocks (as on April 30, 2011) reveals that the fund's exposure to Indian companies has been around 14%.
While undertaking its stock picking activity, the fund manager follows a bottom-up approach. The fund manager seeks to invest in the best opportunities in the Indian and international markets without any specific sector or market cap bias.
Being benchmarked to the MSCI Asia (ex Japan) Standard Index, FAEF's latest portfolio (April 2011) consists of total 62 stocks out of which 12 stocks pertain to Indian companies (which are from the 'A' and 'B' group) and 50 stocks of overseas companies. Also, its top-5 sector concentration is quite well controlled at 10.67%.
How FAEF has fared vis-à-vis its peers
| Scheme Name | 6-Mth (%) | 1-Yr (%) | 3-Yr (%) | Std. Dev. (%) | Sharpe Ratio |
| Franklin Asian Equity (G) | 1.0 | 19.6 | 4.5 | 6.14 | 0.02 |
| ICICI Pru Indo Asia Eq-Ret (G) | -5.7 | 14.8 | 3.3 | 8.46 | 0.01 |
| BNP Paribas China-India Fund (G) | -8.5 | 7.0 | -0.4 | 7.75 | -0.03 |
| HSBC Emerging Mkts (G) | 3.8 | 25.1 | -3.4 | 8.20 | -0.01 |
| Kotak Global Emerging Mkt (G) | 0.1 | 20.8 | -5.0 | 8.07 | -0.05 |
| BSE-200 | -11.0 | 6.3 | 2.3 | 10.20 | 0.02 |
(NAV data is as on May 23, 2011. Standard Deviation and Sharpe ratio is calculated over a 3-Yr period. Risk-free rate is assumed to be 6.37%)
The above table reveals that on the return front, FAEF has shown superior performance vis-à-vis its peers. In a 3 – Yr time frame, the fund has delivered a return of 4.5% CAGR; but returns appear quite paling when compared to domestic (Indian) diversified equity mutual funds which follow strong investment processes and systems.
On the volatility front too, FAEF exposes its investors to low risk (Standard Deviation of 6.14%), and at the same time it has been able to clock a decent risk-adjusted returns of 0.02 (as revealed by its Sharpe Ratio) as compared to its peers. But again this risk-adjusted return looks quite lagging when compared with some domestic (Indian) diversified equity mutual funds which follow strong investment processes and systems. This thus makes FAEF low risk-medium return investment proposition as compared to its peers.
Relative Performance
The graph above shows, 10,000 invested in FAEF and ICICI Pru Indo-Asian Equity Fund (IPIAEF), 3 years ago (i.e. on May 23, 2008), is worth 11,412 and 11,033 respectively on May 23, 2011, whereas a similar investment in BSE-200 [considered for comparison as MSCI Asia (ex Japan) Standard Index data not available in public domain] has yielded 10,693.
However, interestingly the fund has actually underperformed its benchmark index in the past 2 calendar years. This reveals that the fund has not been able to completely take advantage of opportunities available in the Asian economies.
Calendar year returns
| Scheme / Benchmark Index | 2010 | 2009 |
| FAEF | 8.08% | 51.38% |
| MSCI ASIA (ex JAPAN) Standard Index | 12.42% | 60.47% |
(Source: Franklin Templeton Mutual Fund website)
Fund Manager Profile
| Name of the Fund Manager | Mr. Sukumar Rajah | Ms. Roshi Jain |
| Total Work Experience | Over 21 years | Over 9 years |
| Managing the fund since | Nov-07 | Nov-07 |
| Qualifications | B.E. from University of Roorkee & MBA from IIM, Bangalore | CFA, ACA and PGDBM |
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