IIFL WM’s Papneja on advisory shift, alts demand, ETFs take-up

IIFL Wealth Management not only ranks as one of India’s largest and fastest-growing wealth managers but has continued to set the pace in terms of product and service innovation. Asian Private Banker sits with Umang Papneja, senior managing partner and CIO of IIFL Wealth Management, to discuss HNIs’ shift into financial assets, demand for alternatives and ETFs, and how clients are engaging with the firm

Umang, we’ve previously discussed Indian high net worth individuals’ (HNIs) turn to financial assets relative to gold and real estate, and how this is partially driving growth in domestic wealth management. How is this demand shaping your firm’s product offering and business strategy?

HNIs have shifted from traditional asset classes like gold, real estate and fixed deposits to financial assets like mutual funds and managed accounts over the past few years. The table below captures the movement towards financial assets by local investors in India:

 Movement towards financial assets by local investors in India

Our business strategy is shifting from a primarily distribution fee and brokerage model to an advisory and asset management fee-led model. We believe that constant regulatory changes, lack of alignment of interests with clients, and consolidation of funds will drive down brokerage and distribution income. On the other hand, increased demand for alternative investments, increased co-investment opportunities and a shift to process-based and goal-driven investing will drive up advisory and asset management fees.

How is HNIs’ mode of investing changing? Are you seeing any shift towards goals-based, long-term investing and is asset allocation now an entrenched practice?

We recently launched IIFL One, wherein HNI clients are offered institutional grade portfolio management processes and portfolio discipline for their personal portfolios at a very competitive all-in fee, coupled with a host of privileges like access to preferred lending terms, wealth structuring and estate planning services.

The initiative will bring down the overall cost paid by the client in the long run, as well as eliminate the incentive to churn the portfolio completely, bringing tremendous alignment with clients’ requirements.

In terms of investments, what does demand look like right now — particularly from an alternative investment fund (AIF) perspective where we have seen a lot of activity?

Commitments to AIFs have increased over 11 times in the last four years from US$3.2 billion as on 31 March 2015 to US$40.3 billion as on 31 March 2019.

There has been a surge in demand for long/short funds and late-stage private equity funds. The total AUM of long/short funds in India is in excess of US$1 billion, while the securitised debt market has grown 125% in the last three years. Commitments to Category II AIFs — primarily in private equity funds — have also doubled in the year ending 31 March 2019.

Last year was a good one for passive managers in India. What does this mean for the future of ETFs, in particular?

The total AUM of ETFs in India has increased by 50% in the last year and has surpassed some US$14.3 billion early this year.

If you were to analyse the performance of large-cap mutual funds in India from March 2015 to November 2017, mutual funds were outperforming the Nifty 50, generating an alpha of nearly 5%.

Post that, equity mutual funds have not performed well relative to Nifty, and an investor who invested in a largecap equity mutual fund in March 2015 would have earned 0% alpha over the Nifty 50 if he were to remain invested in the mutual fund until March 2018 and would have underperformed the Nifty 50 by almost 5% by March 2019.

The inability of large-cap mutual funds to beat Nifty 50 and the simplicity of investing in a passive benchmark has massively increased the scope of HNI investments in ETFs.

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Asian Private Banker