By Anirudha Taparia, Executive Director, IIFL Wealth
The year 2018 was volatile and replete with political as well as economic uncertainty. International factors like the US government shutdown, global trade war concerns, Brexit uncertainties and the Argentinian crisis along with local events like the IL&FS default, which led to a credit squeeze and fear among market participators, dominated investor sentiment and impacted investment flows. The year also ended with a host of unanswered questions which are likely to hold sway as we progress into 2019.
While some time-tested strategies and approach to investments have proved their mettle, many others have failed to hold strong during the year. In this shifting kaleidoscope of market uncertainty, it would be instructive to observe the current trends in HNI investing. As per a recent study conducted by IIFL Wealth and Wealth-X, a large number of HNIs believe that the best place to book returns right now is investment funds followed by equities and fixed income. Investment funds make up almost one-third of the total assets held by the super wealthy in India and 84% hold at least some of their fortune in these funds.
The Investment Policy Statement (IPS): Some things never go out of fashion. UHNIs strongly feel the need to define strict policy guidelines that can guide portfolio allocations and are robust enough to weather the peaks and troughs of the market. The key lies in creating strict investment guidelines and building a portfolio in line with the mandate. This has helped portfolios deliver consistent performance by strictly sticking to AA and by creating risk exposures in line with the IPS. Additionally, the governance part of the policy has helped avoid accidents - things like over-exposure to any one sector or market cap bias can be avoided, thus making the portfolio immune to concentration risk.
Alternative investment funds and structured products: HNIs tend to gravitate towards alternative investments in an attempt to diversify their portfolios and earn higher risk adjusted returns. Alternative investments could be anything from venture funds, private companies, early-stage ventures, hedge funds and alternative trading strategies. In a market that is peppered with homogenous products, alternative investments attract considerable attention from HNIs. Another type of investment that is expected to find favour among HNIs is structured products. Defined returns, capital protection, known maturity dates and a favourable taxation regime are the top four reasons why HNIs are increasingly choosing to invest in structured products.
Better risk management: When it comes to investing, risk is everywhere. Successful investors realise that the key lies not in eliminating risk (probably because that is unachievable), but in mitigating risk. HNIs are revisiting the risk profile of their investments and are increasingly choosing to invest in debt instruments. They are looking to buy financial instruments to take advantage of rising yields. This is largely due to the recent performance of equity as an asset class and the opportunity to capture a higher yield on debt instruments.
ETFs and index funds gaining currency: The relatively new kids on the block are Exchange Traded Funds (ETFs) and index funds. While one might argue that these have been around for a while, it is only now that HNIs are finding these investments increasingly attractive. They have been nudged in this direction largely by the short-term underperformance of active portfolio managers. From a portfolio perspective, allocations to large-caps is being split between large-cap investments and ETFs/index funds. Additionally, HNIs are also selectively choosing boutique fund managers to manage any specific or alpha creating ideas either through PMS or AIFs. Alpha generation along with wealth protection remain the core requirements of an HNI’s portfolio.
Something for the Future
Philanthropic allocations increasing: As wealth and the wealthy grow in the country, we are seeing a proclivity towards philanthropic investing. In addition to wealth protection and growth, HNIs are now also increasing allocations to philanthropic initiatives and causes.
Increased penetration of technology has ensured that investors are able to compare all the available investment options and make investment decisions that are well aligned with their goals. HNIs are moving away from traditional ways of diversifying their portfolios by investing across boundaries and asset classes. It is clear that 2019 is going to be the year that investors look beyond conventional products and evaluate all available investment options.