HNIs inclined to investing abroad

A. V. Srikanth, CEO, Motilal Oswal Private Wealth Management, talks about trends in investments by High Networth Individuals (HNIs) across asset classes, in an interview to Business Line . Excerpts:

There is volatility in assets classes, such as equity, bonds and gold at this point in time. Are HNI clients looking at real estate?

Till two-three years back, investment in physical real estate was happening at a healthy clip alongside financial investment through routes such as real estate funds. However, in the last two years, the build-up in both physical and financial real estate has slowed down.

It doesn’t have much to do with high interest rates. HNIs, who are investing full blown capital, are not bothered about interest rates unless they are having a levered play and this has not been in action for quite some time. Things like 80:20 schemes too are used by the mass affluent and are not necessarily widely sought after by the HNIs.

How is the interest in commodities after the NSEL fiasco?

The approach to commodities has been through a fixed income mindset in the issue of NSEL. People thought it was a guaranteed product or one with a predictable pay-off structure. Even though they looked at a class which is risky, they went about it as if building exposure in it was supposedly safer for them. In the ultra HNI space, commodities investment has largely been restricted to gold.

How is the demand for investment in gold now?

It has waned a lot. Incremental savings is not coming into gold because one is not too sure now what is the view on gold. Today, there is nothing much to say except that it is a portfolio insurance and hedge against inflation. Near-term visibility of gold prices is very low today. The prices are also at an all-time high and there is a disinclination to allocate more here.

So, what are you advising clients in terms of asset allocation now?

We take independent views on each asset class and modify it based on the profile of the customer. In fixed income, considering that RBI’s moves and market reaction to them have become unpredictable now, it will be best to stay on the shorter end of the yield curve with investments in fixed maturity plans (FMPs) and short-term funds, rather than gilt funds. In equity, minus the sectors which have created polarisation within equities or say the Nifty, the rest of the market is at close to 4,000 levels or lower. If you want to invest, it is time now to start building your portfolio. From a bottoms-up approach, you can take a sector call or you can choose contrarian funds, or fund managers who follow this approach or build it through individual stocks.

In gold, we are now neutral weight and are recommending five per cent exposure for very conservative, conservative and balanced profiles and 10 per cent for moderate to aggressive portfolios. In real estate, we are telling clients that there is likelihood of even more stress and that will be a safe entry point.

We are avoiding levered transactions, pure investment in under-construction projects, and we are encouraging customers to invest in select blue chip real estate which have good rental yields.

Has the rupee fall generated interest among clients for overseas investments?

They are incrementally inclined to put money abroad. But the fact that sentiment has been affected domestically doesn’t give them confidence. Even though there is evidence that you must pursue global opportunities and diversify against your own currency risks, it has not been embraced very highly because of the overall lack of confidence. Flows have definitely been coming into global equity funds, but there is no remarkable shift in people’s mindset. What has changed is people’s willingness to listen to it. A few years back, feeder funds met with unenthusiastic response. Now people are more interested.

Do you see interest from NRI investors in India?

They are taking a fixed income view on India through their FCNR deposits, which are getting levered by MNC banks. Or they are sending money home through remittances. But I am not too sure they are taking a depreciated view of assets they are wanting to buy.

Overseas investors will look at Nifty in dollar terms. When they see Nifty in dollar terms quoting at significantly cheaper PEs, they are likely to conclude markets are cheaper and therefore it may prompt them to invest. That’s not the mind set of NRI investors when investing in India. Considering the rupee has depreciated, they may again go for real estate investment. I keep hearing that enquiries have increased.

How has the propensity to pay fees to advisors changed in the last few years?

When the range of outperformance is narrow, there is very little evidence of how well the advice has been understood and reflected upon. So the customer’s willingness to pay advisory fee today under these kinds of outcomes is becoming lower and lower. That is why a lot of distributors have folded up and lot of advisory firms who fight for their share of the pie have started discounting.

Unless clients see evidence that good advice has come to bear, they will not be willing to pay. But considering that people have reflected and figured what is good and bad advice (since the 2008 crisis), they will be willing to pay when things look up, when range of returns expand.