Authored Article by Anirudha Taparia
The UHNIs tend to have two main portfolio objectives—capital protection and alpha generation.
Billionaire philanthropist Azim Premji famously noted, “With the attention I got on my wealth, I thought I would have become a source of resentment, but it is just the other way around—it just generates that much more ambition in people." This is indeed true. It is inspiring to see and understand how the wealthy amass their fortunes and especially how they continue to keep and grow it. While several books are available on topics of building businesses, starting your entrepreneurial journey or even investing in markets, there are not many narratives on how the ultra high net-worth individuals (UHNIs) preserve and grow their wealth. So what is it that they do differently?
Maintain sanctity of investment policy
A journey without a map can often take you away from your final goal or destination. In the world of wealth management, this map is your investment policy statement. It is a document that clearly defines the investment mandate and lays out strict policy guidelines for achieving the same. The wealthy recognize the value of this document and have maintained its sanctity through the years. A well-articulated investment policy can help achieve the required goals by creating a portfolio that adheres to the risk-return requirements of an individual. It also plays an important role in governance. It helps mitigate portfolio risk and avoid accidents that can lead to concentration risk or bias.
Focus on capital protection and alpha
The UHNIs tend to have two main portfolio objectives—capital protection and alpha generation. For those who have amassed great wealth, there is equal emphasis on preserving as well as growing their wealth. Certain products and investment solutions lend themselves well to accomplishing these goals.
For capital preservation, many UHNIs choose structured products. These are simply hybrid investment instruments “structured" in a way that they help improve the return on a fixed-income instrument, while protecting the downside through derivatives instruments. The layer of derivatives gives them the flexibility to blend with a portfolio and enhance its performance, while matching an investor’s objectives.
For alpha generation, UHNIs have shown a proclivity towards growth assets like equity and private equity. After allocating a certain portion to the relative safety of debt instruments, they allocate the rest to equity. They invest in listed as well as unlisted (venture capital, private equity) equities and see it as a core of their portfolio. They fully appreciate the value of compounding and are not easily swayed by short-term market corrections.
Adapt to technology
Those who are agile enough to adapt to change are the ones who usually stay ahead of the curve. Technological innovation has pervaded nearly every aspect of our lives, transforming the way we live, interact and do business. Embracing the power of technology, UHNIs are now increasingly demanding technology-powered solutions delivered to them in the most efficient and effective manner.
Invest for social impact
Another thing that has always been on the agenda for UHNIs is “giving back to society". Previously this was done primarily through charity by supporting philanthropic initiatives and causes. However, UHNIs are now actively considering social impact which entails investing in companies that are focused on generating measurable social or environmental impact along with financial returns. While wealth protection and growth continue to be the core focus for HNIs, allocations towards philanthropy are also becoming a part of their investment goals.
So do the wealthy invest better or differently? It is a bit of both. Their disciplined approach and commitment to their investment policy makes them better investors, while they tend to invest in innovative products that are well-aligned with their portfolio mandate.
Anirudha Taparia is executive director, IIFL Wealth