Motilal’s fund monitoring MSCI’s EAFE index is a contrarian guess

Motilal Oswal Asset Management Company (AMC) is all set to launch an index fund monitoring the MSCI EAFE Top 100 Select Index. The new fund supply (NFO) for the scheme will run from 15 to 25 November. Being an open-ended scheme, you may as well put money into it later.

EAFE stands for Europe, Australasia and the Far East. These areas prior to now have been persistent underperformers. A Motilal Oswal presentation exhibits that this index would have given 9.3%, 11.5% and 12.2% in rupee phrases over the previous 3, 5 and 10 years. By comparability, the Nifty 500 delivered 19.5%, 16.6% and 15.5%. The S&P 500 of the US did even higher over all three time intervals in rupee phrases. However, each the Indian and US indices have been richly valued after the run-up, presenting a possible valuation case for EAFE.

First, let’s dive a little bit deeper into the EAFE Top 100 Select Index. This index is a subset of the MSCI EAFE Index and it restricts itself to simply the highest 100 corporations by market cap within the dad or mum index. The variety of nations it covers can be decrease at 10, in comparison with the 21 lined by the dad or mum index. As a consequence, particular person shares get increased weights within the EAFE Top 100 Select Index.

The largest 5 shares within the EAFE Top 100 Select Index are Nestle, ASML Holdings (a semiconductor agency), Roche Holdings (a pharma firm), LMVH Moet Henessy (a luxurious items maker) and Toyota Motor Corporation. The three largest nations lined are the UK, Japan and France, which collectively account for round 54% of the index.

The weight of tech shares within the index at round 10% is so much decrease than the near 40% weight that tech occupies in each the MSCI US and Emerging Markets indices.

The MSCI EAFE Top 100 Select Index has a low correlation with the Nifty, of simply 0.42, in line with a Motilal Oswal presentation. This makes it a very good diversification automobile.

In phrases of valuations, the MSCI EAFE Top 100 Select Index trades at a worth to earnings ratio and worth to e book ratio of 18 and a pair of.1, respectively. This is similar to the MSCI Emerging Markets Top 100 Select Index and cheaper than the 26 and 4.8 corresponding figures for the S&P 500 Index.

However, the MSCI EAFE Top 100 Select Index is on the higher finish of its personal historic valuation vary.

Among international passive indices, Motilal Oswal AMC already gives buyers entry to the US markets by means of its S&P 500 Index Fund and NASDAQ ETF. In addition, HDFC Mutual Fund just lately launched its HDFC Developed World Indexes Fund of Funds, which feeds into numerous Credit Suisse Index Funds and ETFs domiciled in Ireland and Luxembourg. These index funds collectively observe the MSCI World Index. However, the MSCI World Index has a roughly 68% weightage to the US, which the MSCI EAFE avoids. Investors who have already got publicity to the US by means of one other mutual fund might discover extra worth on this providing.

“For most Indian buyers, there’s solely area for one worldwide fund within the portfolio and that area ought to go to a US fund. This is as a result of the US is the world’s largest inventory market and economic system and has the world’s most revolutionary corporations. However, subtle buyers who’re eager on a big worldwide portfolio can have a look at this EAFE fund,” stated Amol Joshi, founder, Plan Rupee Investment Services.

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