Motilal Oswal MSCI EAFE Top 100 Select Index Fund Review

Published on / By M. Pattabiraman Twitter: @pattufreefincal

Published: November 18, 2021 at 7:00 am

Last Updated on January 6, 2022

Motilal Oswal MSCI EAFE Top 100 Select Index Fund is an open-ended scheme tracking the  MSCI EAFE Top 100 Select Index. The fund is currently in its NFO period (15th to 25th Nov 2021). This review discusses if investing in this fund makes sense when one can derive international exposure from existing options.

The MSCI EAFE Index is an equity index that captures large and mid cap representation across 21 Developed Markets countries worldwide, excluding the US and Canada. EAFE refers to Europe, Australasia and the Far East. The index currently has 843 constituents and covers approximately 85% of each country’s free float-adjusted market capitalization.

The MSCI EAFE Top 100 Select Index only has the 100 largest* stocks from the top 10 countries by weight in the MSCI EAFE index. * Largest here refers to stocks with the highest free-float market capitalization adjusted for the number of shares available to foreign investors. Exposure to each country will not be more than 40%. We could not find any more information on this Top 100 index on the MSCI site or its historical data at the time of writing.

Shown below are the 10-year rolling returns of MSCI EAFE Net Return (USD) vs MSCI World Net Return (USD) vs S&P 500 TRI USD vs S& P 500 Net TR (USD).

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    Net Total Return (TR) refers to reinvesting dividends after accounting for tax. Since the S&P 500 Net TR history is short, we have also shown data for S&P 500 TR. The MSCI World index includes stocks from US and Canada. It has recently been dominated by US stocks – currently, 68.52% of the total index weight is from the US!

    10 year rolling returns of MSCI EAFE Net Return (USD) vs MSCI World Net Return (USD) vs S&P 500 TRI USD vs S& P 500 Net TR (USD)
    10-year rolling returns of MSCI EAFE Net Return (USD) vs MSCI World Net Return (USD) vs S&P 500 TRI USD vs S& P 500 Net TR (USD)

    The last time the EAFE index 10-year return was higher than the MSCI World Index was in the ’80s and ’90s! Since the MSCI EAFE Top 100 Select Index is also market-cap-weighted, we do not expect it to be different from the MSCI EAFE index. See, for example, Nifty Total Market Index vs Nifty 50: Which is better?

    The dominance of US based-stocks in the last few years is evident in the above and can be seen even more clearly in this screenshot from the MSCI EAFE Index factsheet (Oct 2021).

    Screenshot from MSCI EAFE Index factsheet Oct 2021
    Screenshot from MSCI EAFE Index factsheet Oct 2021

    By the AMC’s admission, “40% of the sales of S&P 500 constituents reported from foreign countries” and “Historically, a large portion of the revenue of S&P 500 constituents’ was from foreign countries”.

    Meaning an investment in the S&P 500 (or select US stocks) provides the retail investor with all the “international diversification” they need. A typical investor wants only a return and goes after shiny investment pie slices and calls it “diversification”. Also, see Sensex vs S&P 500 vs Nasdaq 100: Which is better for the long term?

    An investment in Motilal Oswal MSCI EAFE Top 100 Select Index Fund may make a portfolio more diversified, but this does not mean it will be more rewarding! It would only result in more effort in maintenance, associated taxes and possible higher frustration.

    We, therefore, recommend that investors avoid Motilal Oswal MSCI EAFE Top 100 Select Index Fund. Those who want a slice of international stocks but are unwilling to rebalance their portfolios regularly are better off with funds like Axis Growth Opportunities Fund and Parag Parikh Long Term Equity Fund. Those willing to rebalance can opt for Motilal Oswal S& P 500 index fund but must contend with significant tracking errors. See: Motilal Oswal S&P 500 Index Fund: What return can I expect from this? And Tracking errors of MO S&P 500 Index fund, MO Nasdaq 100 ETF and FoF

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