Motilal S&P 500 Index Fund: 1 month on

[ezra932]

So it's been 1 month since MOAMC opened The S&P 500 Index Fund. The Index is up 9.4% in last 1 month however the Fund is only up 4.2%. Isn't this an abnormal tracking error? What am I missing?

Edit: Apparently I was missing a lot. The difference is much lesser and even the same was on account of the rupee appreciation. Please refer @azknight 's comment below.(

https://www.reddit.com/r/IndiaInvestments/comments/gvwsm2/_/fstxwo3

)

 

[azknight]

@ezra932 Hey guys - I appreciate the comments. I strongly believe in over-disclosure on most things. Pls, see below tracking error analysis for the S&P500 fund. I would be great if you could contact me/my team next time. Putting it out here causes unnecessary debate. Pls, be free to get in touch with me at [pratik.oswal@motilaloswal.com](mailto:pratik.oswal@motilaloswal.com) for any queries. In terms of managing the fund -we keep it simple. Any inflows coming in get deployed in the US the same day. We try our best to keep no cash in the fund. Thanks a lot, guys for your support

Pls find below link for the return table:

https://imgur.com/a/QSvCs2c

There is still a 22bp difference - this is main attributed to transaction expenses (since we deployed large sums) - transaction costs are upfronted and will flatten out over time. Hope this helps.

 

[nischansr]

@azknight Thanks Pratik

Your response should probably be pinned owing to the sheer misinformation on this thread. I had run the numbers recently and found that there is minimal tracking error (about 4 bps on the non TRI index in about a month which is perfectly fine for such a small timeline. And about 27bps on the TRI - though not on these exact dates).

Surprising that people calculate such large numbers here - they are probably mistaken (as already pointed out by quite a few folks) - probably in not recognizing how the NAV is computed.

 

[kayperez]

@nischansr Is this a real account?

 

[nischansr]

@kayperez What's a real account?

 

[ezra932]

@azknight Thanks for the response Pratik. Apologize for the knee jerk post, I should have looked more into the data in hindsight. I think this clears it up. I think it would be great if the mods lock this thread. I will make an edit in the post.

 

[azknight]

@ezra932 No worries at all. I'm glad it's sorted

 

[zashmaster]

@azknight

I would be great if you could contact me/my team next time. Putting it out here causes unnecessary debate.

Actually, as a person involved in the business, you may like the overall outcome. There was a good discussion and people not in MO AMC have pointed out that the tracking error is indeed low.

The discussion is also a reminder to people that forex movements are not always in one direction! My guess is that people had kind of assumed that the INR return would always be higher than USD returns.

And thanks for the comments in the thread.

 

[azknight]

@zashmaster Thanks for bringing this up. I completely agree with you. Most people under-estimate the impact of forex on short - term returns. I've attached a picture of forex impact over the last 10 years. Investors should be wary of forex as well as equity risk in the fund.

The reason correlation between India and US is low is mostly due to the forex impact and not the movement of equity. Correlation between Nifty500 and USD/INR is -0.3

Forex impact slide:

https://imgur.com/a/oaaeigA

 

[resjudicata]

@ezra932 As someone else pointed out, Fund is up 4.2 percent. Add to this that ₹ has appreciated 2.6 percent, we get 6.8%.

The index is up around 9.6% as of today.

You also have to take into account that s&p 500 is up 1.1% today and this figure is what you're using to calculate returns (3115 as of now) while the fund will show this change tomorrow.

So it's probably like ( 9.6 - 1.1 -6.8 ) 1.7% tracking error.

 

[thaonguyen225]

@resjudicata As of last declared NAV it is 10.5784 (June 3, 2020)

In absolute terms it has risen by 5.7% since launch (28 -April).

As per their fund document, NAV is combination of previous day closing of S&P 500 and current day currency rate at 5PM.

Data - Closing Value

Date | S&P 500 | INR to USD

27 Apr | 2878.48 | 76.07 (28 Apr closing)

2 June | 3080.82 | 75.35 (3 June - 5PM)

So, On 28 Apr, 100 INR --> 1.31 USD

S&P500 has increased by 7.02% between 27 Apr and 2 June.

1.31 USD with 7.02% increase will be 1.4 USD.

1.4 USD --> 106.02 INR on June 3.

So I see 6.02% increase whereas MO S&P 500 is at 5.7%.

Given the expense ratio of 0.49%, I guess this fund is in good shape.

Edit. Updated data points.

Source

S&P 500 - https://finance.yahoo.com/quote/^GSPC/history/

INR USD - https://www.exchangerates.org.uk/USD-INR-28_04_2020-exchange-rate-history.html

 

[milktoast]

@ezra932 Could this be due to FX rate?

Rupee has risen against the dollar on the back of a significant fiscal stimulus provided by Fed against a limited fiscal stimulus by India.

 

[sherryr0]

@ezra932 What about losses in hedging positions ?

 

[mayolu]

@ezra932 @azknight

 

[coakland]

@ezra932 https://www.facebook.com/groups/indexheadsindia/?ref=share

Pratik Oswal is active on this Facebook group and one of you could join there and ask him

 

[breaf123]

@coakland He was/is active on this sub too.

 

[travelingfarmgal]

@ezra932 That is a huge tracking error. Hopefully it improves in future.

 

[imageboy]

@ezra932 Would it easen out long term? For e.g, if we consider a 1 year period, shouldn’t tracking issue be less of a problem?

 

[resjudicata]

@ezra932 When we buy n units of any such fund from your country, please factor in the exchange difference between the two currencies. One could end up in a disaster territory too with some. Here's an example of mortgages in Swiss Francs. https://www.bbc.com/news/blogs-eu-30896485

 

[theloverofgod]

@ezra932 Ok about this mutual fund, but do you check income tax compliance for investing in foreign market... ?