For 2017, equity was the right asset allocation but given where the valuations are and how the risk-return ratios are stacked up, is it time to change the orientation now?
After a very good year, that is in everybody's mind but according to us, the equity story still continues. You still have to be overweight but what might change is the preferences where the money goes. It might be a little bit of a sectoral shift, it might be more of a value place. Growth might not get too much of money and HNIs are wanting to bet on new managers. You might call them niche managers or boutique managers. When you see the flows, of course, money is coming into mutual funds but also going into categories like PMS equally from the HNI segment. That will continue for 2018.
I want to get a sense on how 2017 investment pattern has been because there is no taking away from the fact that it has been all win for equities and things like demonetisation have only managed to aid that growth, but where does gold and real estate lie? Are those completely bombed out investments and are people even looking at that, right now?
Yes, if you look at 2017, HNIs were looking at pockets of commercial property and there was no interest in residential property at all. We are seeing some green shoots in some segments but not the HNI segment. It is more on the affordable housing with low ticket sizes. Affordability has come back but if you look at the luxury segment, if you want to look at sales of Rs 5-10 crore or Rs 15-crore flat. I do not think that is happening and it supposed to be slow in 2018 as well.
What about gold?
Traditionally, Indians have invested in gold because our ancestors wanted to probably protect ourselves against the rupee depreciation. As long as rupee is strong and current account deficit etc. is under control, I do not think gold is going to come back even this year.
Not just our ancestors, even Ray Dalio says that it is a great protection trade especially at a time when things get a bit volatile. Getting into 2018 and given the fact that for almost three-four years, gold has underperformed, is this perhaps the time where with the broader commodities rally, one could expect gold to rise in 2018?
There is the possibility of a small rise. I do not think there is going to be a bull rally if that is what you are asking me. There is a possibility that gold might be positive and we are already seeing some signs of recovery in gold but I do not think it is the asset class to focus on for 2018.
If I am interested only in protecting my wealth or my capital and I do not mind 7-8% return but want a guaranteed or an assured return of 7-8%, what is the right asset class to go for? For someone who says look I am ready to take a risk a 15% volatility, 10% downside, but I am looking at superior returns. These are different categories of investors. How should individual A and B move now?
Let us look at individual A first. This person obviously will have a very high asset allocation towards fixed income but at this moment I would be as low maturity as possible thanks to some concerns on fiscal slippage and something which we observe is the difference between repo and G-Sec . That has always been high when there is a bear market. Of course, now the spread has increased to 140 bps or so which is now getting in the fair value zone. May be a few months ago when it was 50-60 bps, it was not warranted at all. I would be very low maturity for this client and may be some equities with protection now. Everybody is in a bullish mode but at the same time when you look at put option prices, for three years on the Nifty you can actually hedge your portfolio for around five quarter or 5.5%, that is it. Three years 5.5% means 1.7% hedging cost for your portfolio. If this client can be put in 20-30% in equity, so he has to put 1.5% as hedging cost and ride the upside because the whole of downside is kind of protected plus there is around 70% yielding in 6, 7, 8% without any risk which should take care of it.
So which is a put to buy, I mean 9000, 10000 and so you keep on rolling it over that side.
No, you just take a 10500 put just for three years. Now the whole upside is yours and from 10500, you are protected up to that. 5.5% of course is a cost but after that you are fully protected.
And the profile B, the risk taker?
There I would be very different. Of course, the core allocation would be mutual funds but I would not hesitate to give money to budding managers who have started quitting their cushy jobs and starting their own PMS and AIFs. These are the managers who not really concentrating on benchmarks and prefer to go for stocks which in trade parlance are not very crowded. I would give a lot of money to such managers for this kind of a client.
Tell us about the market psychology because you must be interacting with these clients everyday. Are they getting a little risk averse right now because there is a chatter as to how 2017 was and how things are so different right now. You have got a challenging macro environment, global markets like us have already rallied so far, valuations are right. Is it a concern with the HNI fraternity or are they willing to pump in as much money as they did at start of 2017 perhaps?
Normally what happens is when the momentum is strong, the concerns go away.
So they are pumping in more money?
Our job as a wealth manager is to stick to that asset allocation which we had agreed on when we started the relationships. Sometimes it becomes difficult but that discipline will come in handy today. For example, if we had agreed on 50% equity and 50% fixed income and that 50% is going to be 60%, believe me it is a very difficult job for him to come back to 50%. Instead he is thinking of 60% to 70% now and we are thinking of that 60%.
So greed is coming back..
It is our job to make him come back and cut back from 60% to 50%.
And you are doing that and you are cutting on allocation?
Of course, yes.
Does that mean that you are advising clients to increase cash levels?
I am saying we are sticking to the asset allocation which we had agreed on.
What was broadly the allocation that you have given out?
It depends on each client. If there is an aggressive client, it could be as high as 70-80% or if conservative, it might be 20-30%.
On an average on equities for 2017 and what would be the advice in 2018?
This goes profile wise but on an average, for a balanced investor I would say more like 45-50% equity.
In India, there is a psychology when you buy a car you ask the car dealer kitna average deti hai? I am sure when your clients are coming to a wealth manager they would ask return expectations. Let me create the categories here. You can fill in the blanks return expectations from equity, mutual funds, return expectation from balanced schemes and return expectations from some of these fancy new products which have come out whether it is AQF or a PMS scheme which is very finely crafted individual stocks and small cap stocks?
I would say equity should give you around 15% so mutual fund...
15%. So you are still very bullish on equities?
We are. Mutual funds then should be around 18-19%, PMS should be around 20% odd.Then you can kind of calculate.
So there is no risk in the world?
No, it is not like that but as I said we have to protect ourselves with the put options which I have discussed.
Let us construct a scenario right now. Assuming that there is a Rs 1 crore investment ticket size, someone is looking at returns in the next two years. If you had to start deploying that money right now within an average risk appetite, what would the asset allocation pie be like? What percentage of that one crore would go into equities? How much into debt? Would you advice investing into gold, realty at all?
I want to go a little granular. Let us assume we have agreed to say a 50-50 allocation for this kind of a risk profile but what goes in the 50% is also important today. Just chasing the same growth stocks might not be a good idea in my view because many of those trades are becoming crowded. I might want to probably diversify a little bit on the contrast side, might go into sectors or may be managers which are not playing that crowded trade.
You mean IT and pharma?
Could be selectively, could be say may be chemicals or could be many other sectors, could be state-owned banks for example. It could be anything which is not crowded at the moment. I kind of diversify the risk in style, so whether it is growth style investing or trying to do contra or more value, at this point, will become very important for me so that I do not just follow the crowded trade. When you do that manager style diversification, you should be okay because it does not mean that you are looking at the Nifty. Nifty does not do anything for this year. That does not mean stocks will not do anything for this year. If you target the right sectors which are showing signs of earnings recovery, we should be fine.
But are you as optimistic about 2018 as you were about 2017? Actually, at the start of 2017, the market was circumspect. If there is a level of optimism right now, are we bracing ourselves for some correction?
There could be. For the first time in my career, I have not seen any correction for 15 months or so. There can be a correction but if you diversify among styles and do not go into the crowded trade, you should be fine.
There has been a serious bent towards financial inclusion. Alternates are not doing well whether it is fixed deposit, gold, or for that matter even real estate. Are you getting a sense that wealth or asset under management for wealth managers like yours is going to increase radically and dramatically and this entire SIP culture or the PMS culture which has started at HNI level still has a long way to go or are these just barsaati mendaks and markets will fall and redemptions will also start?
Let us talk about mutual fund flows. On an average, mutual funds are getting Rs 20,000 crore in equity flows per month, out of which around Rs 5,000 crore is in SIPs, say Rs 3000-4000 crore comes from provident funds etc. and Rs 10000 crore is lump sum and that Rs 10,000 crore could be a barsaati mendak which you mentioned but the remaining 10,000 is fairly sticky and has the potential to go up, For flow, from an AUM perspective, we will not see any disappointment. That is my view.