One of the key aspects of building a solid portfolio is diversification. Numerous studies have shown that including a mix of various investments within a portfolio can yield higher returns over the long run and significantly reduce risk. Through diversification, a portfolio contains securities that are not perfectly correlated. In the past, diversification involved selecting a bunch of US securities across various sectors and industries.
With the ascension of online trading, the investors’ reach expanded and further diversification can be obtained by picking stocks from multiple geographies. Securities from different countries will be even less correlated, because the economic situation in one country will not be the same as in another.
The US bull market has been running for nearly a decade now and, while the rally might continue for another couple of years, the returns might not be as strong as in the past. Therefore, a good idea might be to look for investment opportunities overseas. European stocks have an optimistic outlook, and so do some emerging markets. One emerging market that is expected to perform very well is India. Indian economy has grown by 7.2% in the fiscal third quarter ended December and for the full fiscal 2017/2018, growth is expected at 6.6%.
The IMF forecasts that, at a 7.8% growth, India will have the fastest growing economy in 2019. By comparison, Chinese economy is expected to expand at 6.4%. Over the long run, Indian economy is expected to maintain its leading position as the world’s fastest economy, outpacing China.
So, for better geographical diversification, one should consider investing in Indian stocks. There are a bunch of Indian companies listed on the US stock market as American Depository Receipts. ADRs allow investors to gain exposure to foreign companies easier than buying the foreign stock outright. Rather than looking through all Indian stocks, we focused only on those that are the most popular among smart money investors. While often hedge funds don’t buy US-listed stocks of foreign companies, choosing instead to invest directly in foreign markets, a significant number of investors among those we track have piled into ADRs of Indian companies.
The hedge fund sentiment is an important metric when looking for investment opportunities, because hedge funds have more expertise in picking stocks and better resources than smaller investors. While we can’t always identify the rationale behind a hedge fund’s move in or out of a company, by focusing on the consensus picks among multiple funds we can still identify stocks with potential to outperform the market. Based on extensive research and backtesting, we have developed a strategy that identifies the best consensus picks among the 100 best-performing hedge funds. Since May 2014, our strategy has returned 74.4%, beating the S&P 500 ETF by more than 20 percentage points. You can take a look at the latest picks from our strategy by accessing our premium newsletters free of charge for 14 days.
Now, let’s take a look at the five most popular Indian stocks among the hedge funds in our database.