Motilal Oswal AMC launched the Motilal Oswal MSCI EAFE Top 100 Select Index Fund (MOST EAFE). This is the latest wave of NFO in the past year, a promising geographic diversification opportunity for investors in India. Compared to last year’s internationally oriented NFOs which were mostly funds of funds, MOST EAFE is an index fund. This, however, as such, does not make a significant difference to investors. The fund offers debt taxation with indexation benefits after 3 years.

The bottom

MOST EAFE will invest in securities of the MSCI EAFE Top 100 Select Index (MSCI EAFE 100) and will reflect its performance subject to tracking error. The MSCI EAFE 100 is a subset of the MSCI EAFE Index, one of the largest non-U.S. ETF themes in the world, designed to represent the performance of 21 developed markets in Europe, Australasia and the Far East. -East. Within this framework, the MSCI EAFE is designed to exploit investment opportunities in the top 10 of the 21 countries and the 100 largest companies in the investment universe of these 10 countries.

Equity weights are based on market capitalization (adjusted for free float and foreign investment limits), and country weights are capped at 40 percent. Rebalancing is quarterly. Based on historical data and market capitalization, the MSCI EAFE will cover 48-49% of the parent index.

Index characteristics

Currently, the top 10 EAFE countries and their approximate weights in the index are Japan (19 percent), UK (20.4), France (15.2), Switzerland (14.7), Germany (11.2), Australia (7.4), the Netherlands (6.8), Hong Kong (2.7), Spain (2.1) and Sweden (0, 5). In sector terms, finance (18%), healthcare (16) and consumer discretionary (15) represent nearly 50% of the index.

The top 5 stocks in the index are consumer staples giant Nestlé (4.4%), semiconductor company ASML Holding (4), healthcare company Roche (3.3%), fashion leader LVMH Moët Hennessy / Louis Vuitton (2.5%) and automotive major Toyota Motor.

Disappointing performance

On the performance front, the index returns as such have been disappointing over time. Over the past 10 years, it has yielded CAGR (INR) returns of 12.2% versus 15.5% for the Nifty 500 (all TRI), and over the past year it has returned 26.8% against 62.9% for the Nifty 500. It also significantly underperformed the US S&P 500 during these periods (see table).

In addition, the returns of the MSCI EAFE 100 would be even lower without the advantages of the depreciation of the INR currency against the respective currencies of the countries in the index. Although its annualized volatility over 5.3 and 1 year is lower than that of the Nifty 500, the difference is not significant to compensate for the lower returns.

In terms of valuation, as of September 30, the index was trading at a PE of 18 times against a 10-year average close to 16, a P / B of 2.1 times against a 10-year average of 1.7 . The dividend yield was 2.7% compared to an average of 3.5% over 10 years.

No convincing case

According to NFO’s presentation, the need for Indian investors to diversify into international markets is certainly strong given the opportunity it offers and also due to the crowding out of scarce opportunities in some pockets nationally. that stretches valuations. However, diversification for the sake of diversification can lead to sub-optimal returns for investors.

The objective of international diversification must be supplemented by a sectoral theme (information technologies / new-age companies in the United States, REIT, renewable energies), or cyclical (countries rich in raw materials), or geographic (emerging economies / borders). As such, the MSCI EAFE 100 does not offer a strong theme. This may be more relevant for developed market investors (institutions and individuals) who may already be heavily invested in the US and therefore may need to diversify into non-US developed markets to hedge their risks. However, this is not the case for Indian investors who are still largely under-invested in US markets or in megatech / growth / innovation themes on a global scale. The first choice of diversification must be made towards thematic offers and the American markets.

A significant value buying opportunity that can compensate for the lack of a strong theme is also missing in the case of the index. Although its valuation is cheaper compared to Indian or US benchmarks, it is above historical levels.

The index may fall relatively less in a stock market crash, but the reason for buying stocks is not because it will fall less, but because it must offer strong growth opportunities compared to risk-free options .

There may be cases of buying in specific geographies within the top 10 EAEO countries, such as the UK, whose benchmark FTSE 100 is still trading below pre-Covid levels and seems to offer good prospects for absolute value / growth. However, its weight in the MSCI EAFE 100 is only 20 percent and therefore a better way would be any ETF or FoF that directly offers call options in such undervalued geographies (currently none). .