Where the rich are investing

Even till a month ago, Nitin Rao was pretty optimistic about equities. “From overweight, we have moved to neutral,” says the soft-spoken CEO of Reliance Wealth Management. He simply describes the last four weeks as mayhem — one that saw the benchmark index coming off 10% from its August high to 34,950 as of November 5. What the fall does not reveal is that many large caps and mid-caps have come off by 30-50%. While the benchmark is currently trading at a one-year forward of 21x, Rao does not discount the possibility of it going down to a level of 15x.

That’s starkly different from what the sentiment had been over the past few years. A sustained bull run over the past five years had seen high networth individuals (HNIs) piling into equities with the share of discretionary portfolio management service (PMS), as a share of total MF assets, more than trebling from Rs.380 billion to Rs.1,019 billion by the end of CY17. In fact, 2017 ended with the Sensex logging its best 3-year return of 29%. The market was on tear in CY18, touching a high of 38,989 in August. However, the tightening of interest rates, the sudden spike in crude prices and the scare in the NBFC space, thanks to the trouble at infra-lending behemoth, IL&FS, toppled the gravy train.

Gautam Trivedi, co-founder and managing partner, Nepean Capital, points out that the bull run, which began in August 2013, was helped greatly by falling interest rates and alternative asset classes such as real estate and gold losing sheen. Trivedi is convinced that it will take a lot for HNIs to be convinced about equities. “In the recent past, mid-caps have taken a big hit. Apart from that, the news around IL&FS and Yes Bank has not helped either,” he says. The worry for most folks is that this carnage may last a little longer. According to Trivedi, the correction has been long overdue. “No incremental money will come in for a while and there is reason to believe that equities have still not bottomed out,” feels Trivedi.

Even as stocks took a hit, concerns around debt defaults following the IL&FS crisis saw liquid and money market funds logging a record outflow of Rs.2.11 lakh crore in September. However, in a rising interest rate scenario though conventional bank deposits are looking better, on a post-tax return basis, bank return pale over debt funds over a three-year period. “The best option looks like fixed income,” says Rao. Ankit Chona, who sold his ice cream business to South Korean Lotte International for over Rs.10 billion, is most comfortable investing in fixed income, which accounts for 50% of his personal wealth. “I am quite content with 12% (pre-tax) return,” says Chona.

In a rising interest rate regime, Rao sees equity-linked debentures as a good option, which offers a reasonable rate of return. “Given the lack of clarity around oil and questions around the way Iran sanctions will play out, systematic term plans, too, are a safe bet,” he says.

New avenues

Interestingly, alternative asset class is slowly gaining acceptance. Most HNIs are looking at entering into private equity investments on their own instead of being investors in a larger fund. Trivedi says it facilitates greater control over the fortunes of a company. “There are definitely higher levels of interest in this area,” he thinks. Typically, this will be done by family offices of the likes of Azim Premji, Ratan Tata and Harsh Mariwala. 

Lakshminarayanan KG, director (investments), Catamaran Ventures, a family office owned by Infosys’ co-founder NR Narayana Murthy, says they have taken an approach of investing both in public equities and private investments. “However, most of our investments are direct, which gives us line of sight into the business and the management dynamics. It also means we have control over liquidity and predictability of return,” he says. Catamaran has thus far made around 30 investments in some prominent names, including Sundaram Finance, SKF, Vesuvius and Hector Beverages.

Similarly, Radhika Ghai, co-founder, ShopClues, has taken a fancy to start-ups. “Though the asset class is volatile, there have been instances where I have made 10x return,” says Ghai, who has parked 15% of her wealth in start-ups. Ranjan Pai, chairman, Manipal Education and Medical Group, is another such investor. He has invested over 50% of his wealth in start-ups over the past five years, with the best exit fetching him 15x return.

Getting real

Even as alternative gains ground, the traditional asset class of real estate is taking a knock. Rasesh Kanakia, chairman, Kanakia group, maintains that HNIs are looking at real estate but with a difference. “We see demand only for commercial and not so much for residential real estate,” says Kanakia. In large cities, real estate prices have stayed flat for five years now. Kanakia anticipates the scenario post Rera — Real Estate (Regulation & Development) Act — to be a little more conducive to quality developers. “The sector will become a safer investment offering higher levels of transparency. With equity and debt looking volatile, money could move into real estate but only for commercial properties,” feels Kanakia.

The 18% GST on residential realty coupled with high interest rates will remain a deterrent in cities such as Mumbai, which are fetching almost negligible rental yields at 2%. “Commercial is still offering a return of 7-9%. Some large assets are being lapped up by big names such as Blackstone,” reveals Kanakia.

A report by Kotak Wealth shows that real estate allocation has been trending lower and accounts for 26% of the HNIs’ average asset allocation,  from a high of 32% in FY17.

Which way to go?

While real estate no longer seems to be in contention, the choices have narrowed down to equity, debt and alternatives. Lakshminarayanan points out that with every asset segment (debt, public equities or private investments), the return they seek is based on risk and liquidity that comes with it. “There have been no changes in our return expectations over the past 12-15 months. Given the hardening of interest rates, we may have to revisit our expectations as the cost of equity is linked to risk-free rate.” 

While some are reassessing their exposure to equity vis a vis fixed income, some ultra HNIs such as Amit Jatia, who runs the McDonalds franchise in the west and south, are looking to enter equities in a meaningful way. Following a family settlement in the early 1990s, his family ended up owning vast amount of real estate, which led to land development becoming a core business. While Jatia has hardly invested in equities barring what the family owned historically, he reveals that his son is far better at it. “I will leave it to him to invest in stocks,” he says. But it comes with a clause — Jatia wants any asset outside of his business to fetch 12-15% return.

But given that 2019 is expected to be a roller-coaster year with general elections and macro headwinds, the narrative could well change from return expectations to capital conservation.