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Welcome to Upper Crest, Outlook Business’ annual Private Wealth Roundtable 2013.  It’s a great pleasure to have all of you again here. To start off, the one thing that really marked 2013 was that there were no new highs, no new lows. Except for the rupee, which misbehaved, it has been a sort of a year where the Sensex moved in a range of roughly 2,500 points, although within that range you saw sentiment swinging from moments of total despair to modest optimism.

Last year, most of our panelists felt that fixed income would be the safest bet for the year, but even that proved to be only half true because the spike in yields ended up denting fixed-income funds. Real estate, again, has been a mixed bag, with correction in pockets. Gold, of course, has been the dark horse, but even that gain was largely driven by the depreciation in the rupee as international prices weakened.

Net-net, as things stand now, there seems very little reason to be optimistic, but then, we all know that in the world of investing, last year’s performance is no indicator of next year’s. Therefore, throughout this panel discussion, we wish to reflect on the performance and lessons learnt this year and how you see the next year panning out. First, reflections on 2013: how did you cope with it?

Satya Bansal (SB): As you just summarised, we have seen a good amount of volatility, at least in terms of the mood in the market, if not in real numbers. If you take each of the asset class, I think equities have been largely out of favour. Most high net worth families got quite carried away by the exciting return they were getting in equities earlier and there was over reliance. So, when things turned out differently, they have shied away. And now, debt is being overplayed in the market and we are seeing significant flows towards that. 

Going forward, our view is that we would carry some amount of re-investment risk in 2014. Typically, in our experience, as and when  yield starts softening, we usually see a significant amount of run-up in the equities market, but catching this run is always tricky. In any case, we should see some allocation back into equities. Second, we have seen significant client interest towards making investments in their own business. Given the bargains, there is an openness to buy business assets.

Third, I think we have not used forex as an asset class in India. Although we have seen large diversification in the form of gold, now we could see some geographical diversification as there is wide debate going on with regard to India’s relative performance versus other developed and emerging markets. 

Vishal Kapoor (VK): From a learning perspective, two things stood out in 2013. One, within the broad market, we found some very divergent performance. So, while by and large asset classes did not do great, within them there were many interesting opportunities and investors did make a lot of money. As a case in point, as the rupee depreciated, those who had invested in international markets made good money.

Even within equities, there was a huge difference in the performance of sector funds. Within equity funds, you had the worst performer return, say, negative 7%, and the best performer return 12%. Product selection, therefore, became very important. So, as a theme, alpha [focus on individual excess returns] rather than beta [market returns] became important. 

Second, even within asset classes, there were periods of great performance. There was a time when you got fantastic return in debt funds, though not all through the year. Therefore, you were better off if you looked at your portfolio more actively. Third, the mixed performance of different segments and at different times, underlined the need for diversification. 

Nitin Rao (NR): In HNI portfolios, we believe that 30-35% of their wealth is already invested in direct equity, be it in businesses or their own companies. If you add the other equity holdings they may have as investments — private equity, PMS, mutual funds or individual stocks — the exposure would be approximately 50%. The other 50%
is in debt. 

Last year, equities as an asset class has been stable and debt saw interest rates go up, which changed the game. Some equity investors saw bonds giving 8.5% tax-free, so they moved there. Debt will continue to be preferred as you are getting higher returns. FMPs, tax-free bonds are the flavour of the season. Right now, we are seeing NRIs getting money into India, because for NRIs, return on rupee funds are phenomenally high. 

Fresh investments may not happen in equities, but portfolios are well balanced to capture the upside. Over the past three years, equities have given meagre single-digit return and it could catch up next year. In the last three elections, the market gained twice and went down once before the elections. We seem poised for a rally, although we aren’t sure of the timing. By March 2014, we expect a Sensex level of 25,000. At the most, it may get delayed by 3-4 months.  

What has been your experience with clients? Compared with last year, is there a marked change?

Karan Bhagat (KB): Equities portfolios broadly have done well over the past two years. Barring a few funds with over-exposure to PSU banks and infrastructure companies, technology, pharma and FMCG have given decent return. Equity allocations did come down but over the last three to six months, investor interest is crawling back. The only problem is we do not know how long these outperforming sectors will do well. 

Short-term debt funds are seeing redemptions and that money is moving into long-term FMPs because people want to get rid of the re-investment risk. Our experience over the past couple of months is that clients are really interested in non mark-to-market long-duration products. On the debt side, clients are not in a hurry to exit. If at all, they could exit at yields below 8.15%. 

The standout trend is that both promoters and professionals have started looking at investments from the standpoint of wealth preservation as opposed to wealth creation. They are looking to invest largely in their own businesses where they are more confident and their return expectation has proportionately reduced with their risk appetite. 

Rajesh Saluja (RS): 65% of our assets are in growth assets — equities, real estate and private equity funds. There is pessimism but our clients have not moved out of equities as our focus always has been on investing in quality businesses with strong operating cash flows and high return on capital. In real estate, too, our focus has been on risk management and, hence, we invest with prudent, mid-size developers with good execution track record and in projects with cash-flow visibility. This has ensured no defaults and returns upwards of 25% a year.

In fixed income, we remain at the shorter end of the curve as there could be more action at this end before longer-term yields come down. The RBI’s focus in the short term will be to contain inflation but focus on growth in the long term. As an investment philosophy, we do believe that the best investment opportunities exist in the worst times.

Hence, we raised our private equity fund last year with the strategy to take a significant minority stake in mid-market profit-making companies that are available at reasonable valuations today. We were able to raise ₹300 crore with many HNI investors giving us large cheques to come in as anchor investors and look at co-investment business opportunities. In terms of asset allocation, we continue to remain slightly overweight on growth assets, between equity, real estate and private equity. Our most aggressive client will have 75% in growth assets and 25% in debt, and a balanced profile investor would currently be 55% growth and 45% in fixed income.

Atul Singh (AS): For our client portfolios, we tend to look at three different pockets. One is capital preservation: all kinds of fixed income instruments fall in there. Then you have growth assets, which could be real estate or equities, and finally the aspirational pocket, which has commodities, private equity and international investments.  

So, if you look at these three pockets, as everybody said, there is a massive flow into fixed income in 2013. On the growth side, I think real estate probably held okay, but in equities, one of the key trends was large-cap equity mutual funds. Investors have played it safe by picking proven fund managers. On aspirational assets, I would say the story is fairly bad, with the fiasco in commodities, long waiting time in private equity and volatility in international funds. 

And going ahead, as Rajesh said, we tend to over-estimate what is going to happen over the next couple of years and under-estimate longer term trends. So, if there is supreme pessimism in the short term, then, as advisors, it would serve us well to have an eye on the long term, especially if the tenure of the portfolio is long term.

How willing and open are clients right now to thinking long term, given that broad market returns have been weak? 

AS: I guess that is part of our job. In markets, it is about deciding at what price you want to pull the trigger and then waiting for volatility to give you that opportunity. The key is not whether you get that opportunity or not, but whether you will act when you get that opportunity. One thing different this year was that we had to explain fixed-income volatility to clients after several years. Clients are used to volatility in equities, but not in fixed income. And however ultra-HNI they may be, when they see their fixed income portfolio lessen in value, they do panic. 

RS:If you are able to demonstrate that you are buying quality stocks at reasonable prices, you don’t have to worry about the index and over the long term, your portfolio will deliver returns. With clients, we tend to take the conversation away from the Sensex and focus on creating PMS portfolios with strong businesses. This has helped us deliver returns between 12% and 16% a year over the past three years.

NR: Savvy investors are open to tweaking their allocation based on the opportunities available. So, when the market went to 20,000 — and it did that once or twice in the year — some of them decided to rebalance their portfolios. That cash may have gone into an FMP and may get redeployed into equities at an opportune time. 

For 2014, do you see more clients going into wealth creation mode or will the capital preservation status quo continue?

SB: I think it’s both, although that may not be the answer you are looking for. But you have to see it through the client’s eyes. If we take a practical example, investing in equities or buying a piece of land, both, at some stage, go through moderation or volatility. But investors don’t react as severely to land prices going down, as they react when their stocks are taking a beating. Today, there are larger risks, possibly in real estate than in equities, but people are still comfortable. Equities have not been that bad a performer, but you still see more pessimism around equity because equities reflect how the business environment is being perceived. The fact is that promoters or owners are not seeing the business environment as positive. 

VK: Fundamentally, we think equities are fairly valued and there is no need to sit out. But it isn’t easy to convince investors at this point, given the pessimistic environment.

NR: I think everyone now is an expert in capital preservation, so we don’t need to dwell on that. We would like to have a growth stance this year but most investors ask, “What’s the hurry?” 

RS: In recent years, there have been many short-term noises, both domestic and global, that have resulted in a volatile market. Today, the sentiment is poor and promoters are hesitant to invest. Same is with FIIs. FDI, too, will wait for the new government and, hence, it is unlikely that major inflows will come into equity markets prior to elections. So we may need to take a tactical call this year based on the election results, which may not necessarily be long term. 

AS: I agree. Today, as much love as there may be for fixed income, the reality is that it is barely beating inflation and, all said and done, if our economy grows at 7% real growth and 8% inflation, you are talking a nominal 15% equity return. So, there is a case for equities, there is no denying it. That was the case then and that is the case now. Onn the basis of a 15% expectation, you cannot invest all your money there; you need defensiveness in your portfolio. So you have got to keep your asset allocation and take some tactical calls based on the volatility you can stomach. Now, tactically speaking, would you be brave before elections, etc.? Probably not. I think before elections, it is fair to be conservative, but it is also fair to be looking out for opportunities. 

Satya, you said, going forward, you expect a greater level of geographical diversification. What kind of overseas diversification are you recommending and what is your house-view on economic growth?

SB: Our house view is that, as far as the economy is concerned, we have taken a positive turn. Early signs are visible in the overall growth in the IT sector. That apart, we see agriculture growth at 4-5% this year, which should have a positive rub-off on overall consumption as well as the savings cycle, at least in rural and semi urban India. That should give us a better picture on the IIP side as well. Moreover, past experience shows that you can expect around 0.25-0.5% addition to GDP in an election year because of higher spending. 

As for geographical diversification, we all believe that India is a long-term structural story, and ignore that there has to be some diversification across geographies. Given the way developed markets have performed in the past two or three years, there is no reason why the Indian investor should not have taken advantage of it. It is not just the US; you can also invest in other emerging markets through feeder funds. 

Vishal, you made the point about dispersion in returns. Can you tell us what is your criteria for stocks and fund selection? 

VK: We now focus deeper at the product level and not just the asset class like we used to in the past. That is because the difference in the returns of various funds is huge and it makes a significant difference to overall performance.  

Is that a function of the nature of the market itself? Say, when markets move in a range with strong sectoral trends at play like last year, there is great scope for individual fund managers to outdo each other. In which case, should you really think about it that seriously? 

VK: Certainly, for the time being, it is a consequence of the market. Now, will this sustain over time, across a normal period, it’s difficult to say. But how we would do performance evaluation has clearly changed. We could afford to be more tolerant of some under-performance earlier, but, now you can’t because the under-performers are continuing to under-perform for much longer periods of time. You now need to be sharper to create a credible portfolio. So, be it funds or private equity or whatever, you have to focus on the micro factors. 

NR: To add to what Vishal said, last year was a very shallow market with just a few stocks performing, so a fund manager who took a generalised call did not do well. As broad growth comes in, you will know the underlying reason for outperformance and whether that can be sustained. 

Rajesh, what kind of opportunities do you see in the real estate space?

RS: It is attractive, but over the last one year, the risks in it have increased because the real estate market itself has been cash-strapped with slowing sales and demand. While there are enough and more people willing to lend, you have to be mindful of whether there is visibility of cash flow or you are just lending against collateral. Given our legal framework it is tough to sell the underlying collateral easily and, hence, one must take promoter guarantee from other group companies etc., to cover risk. Do you have access to the developer? Does he pick up your phone? These are the other subjective things one needs to look at, along with cash-flow visibility.

So, within each asset class, risks remains, but opportunities still exist. Over the past six months, because of some defaults in real estate NCDs sold by other wealth managers, clients have become a little apprehensive. However, with quality developers backed by quality projects, collateral and cas-flow visibility, we are still raising ₹75-80 crore every month on NCDs. Real estate will continue to be a preferred asset class — you have to just diversify across three or four developers and secure yourself with guarantees from group companies and so on. 

KB: Real estate debentures that have matured over the past three to four years are the ones that have actually saved the day. Clients are getting paid back 11% to 12% on a compounded basis. It is nowhere close to what they expected (17% to 18%), but still, this 11% to 12% is for a period of six years.  

Atul, what is your stance on commodities? Are you persuading clients to commit capital there or are you recommending caution?

AS: We believe that long-term wealth is created with boring products and that is why we never sold any commodities-related product to our clients. The only kind of commodity products that our clients really had exposure to was arbitrage products using commodity futures, which was essentially a fixed-income product that delivered returns of 17-18%. Even here, a lot of our time was spent explaining the risk of this seemingly riskless product. We were ourselves worried about the risk, of course, but we didn’t know there could be an element of fraud. But that apart, we felt the clients didn’t fully understand the risk and some of them have turned risk-averse after the episode.   

That brings us to the end of the discussion — we now have a fairly good idea of the learnings from last year and what to expect in 2014. Thank you, gentlemen, for taking time out and sharing your advice for the benefit of our readers. We wish you all a very happy Diwali.