In a Q&A, Anirudha Taparia says investors should not be swayed by market momentum, and must find deep value by identifying robust long-term themes available at compelling valuations.
The market rally has been fuelled by liquidity, which has found its way into financial assets, says Anirudha Taparia, joint CEO, IIFL Wealth. With a low interest rate and low inflation scenario, he tells Ashley Coutinho that the party in equities is likely to continue. Edited excerpts: Q.
Q. What do you make of the market movement this year?
The market rally has been fuelled by liquidity, which has found its way into financial assets. The US Federal Reserve has, in the last 15 months, pumped in liquidity of $3 trillion, expanding its balance sheet from $4 trillion to $7 trillion.
With a low interest rate and low inflation scenario, the party in equities is likely to continue. However, inflation is a key risk to watch out for since it could threaten the low interest rate regime and consequently, have a degree of impact on the liquidity that flows into equities.
Q. What are your views on mid- and small-cap stocks at this juncture?
When the market tide changes for the positive, large-caps take the lead. This is generally followed by mid- and small- caps. Investors should not get swept away by market momentum. Instead, look to find deep value by identifying robust long-term themes available at compelling valuations. Themes that can play out well include capex-related turnaround stories and tech businesses that are disrupting brick and mortar.
Q. Has the risk-on sentiment returned among wealthy investors?
The investment decisions of our clients are primarily driven by their asset allocation strategy, which takes into consideration their wealth preservation and growth requirements along with their risk profile. Consequently, it automatically adjusts for risk. Interest in structured products, especially in the current low interest rate scenario, continues to be strong. Further, there is also interest in pre-IPO investing. However, such allocations are usually limited to 3-5 per cent of the investment portfolio.
Also, in a low-yield environment, inevitably investors are looking for better risk-adjusted returns. These investment decisions are made from a portfolio perspective. Investors who have the stomach for risk are showing interest in credit risk funds and private equity. Such allocations usually do not exceed 5 per cent of the portfolio.
Q. Are wealthy investors increasingly looking to create global portfolios? What is driving this change?
Wealthy individuals in India have shown a proclivity to invest in global assets. The allure of global investments primarily stems from the diversification benefits that these investments offer. Investors can gain from innovative investment themes available globally and partially hedge their portfolio from a depreciating rupee.
Between 2010-2020, absolute Sensex return was about 136 per cent while S&P 500 generated 190 per cent. The INR started the decade at 46.53 per USD and closed the decade at $71.38. In the 10-year period, USD appreciated by about 53 per cent against INR. With the dollar gains on your S&P 500 investments, the absolute returns would be closer to 400 per cent. This translates into an outperformance of over 208 per cent.
In the last year, we have seen keen interest among the wealthy to purchase a home in London, Dubai and New York and immigration activities in EB5, Portugal and Malta.
Q. How has digitisation changed the wealth management business, especially in the aftermath of the pandemic?
We cannot eschew face to face interactions in favour of digitisation. Digitisation, however, is playing an integral role in making portfolio analytics and insights available to clients seamlessly. With digitisation, investors can deep dive into portfolios and get nuanced perspectives to make informed decisions.
Q. IIFL Wealth now has two core revenue streams. One is annual recurring revenues, and the second the brokerage business, which is execution-driven. Could you tell us more about this bifurcation and the focus areas for the future?
We manage an AUM of over $30 billion and about 50 per cent of this constitutes Annual Recurring Revenue (ARR), which includes fees and commissions. These are calculated and paid or earned at fixed intervals as a percentage of assets. Brokerage revenues on the other hand are transactional in nature and are earned one time at the point of execution of the transaction such as buying or selling stocks, bonds, commodities, currency and debentures.
The focus is to grow our recurring revenues such that our revenue streams become noncyclical and stable. We are looking at growing assets that earn recurring fees rather than focus on doing one-time transactions. The single largest benefit of this approach is that as wealth managers, we become largely product agnostic and can focus on asset allocation and growing the portfolio as per client requirements. Thus, we achieve complete alignment of interest.
Q. The growth in distribution-based products has faced some cannibalisation due to IIFL One. How are you addressing the issue?
Our primary focus remains to grow our ARR assets, and whether that happens via assets that earn trail commission as a distributor or fees as part of IIFL-One offering makes just marginal difference to our larger aim. IIFL-One is a pioneering initiative to give clients an option to implement a pure fee driven wealth management model. This has been very successful in other parts of the world and we believe this would be the future model for India as well. We don’t really think of this as cannibalisation but rather a move towards the future of the wealth management industry.