India’s uber rich are balancing their financial portfolio

TREADING CAUTIOUSLY

Bogged down by fears of shrinking asset values, India's uber rich are balancing their financial portfolio with caution and smart churn.
Lisa Mary Thomson & Shobhana Chadha find out the money & mindgames of HNIs

3.30 pm, Friday, October 10, when the stock markets closed for the day.
* Mukesh Ambani found his kitty to have shrunk by 47.2%.
* Anil Ambani coped with a 68.8% drop in his riches. * Ratan Tata saw his assets decline by 49.5%.
* Sunil Mittal felt a plunge of 28.4% in his treasury.
* Azim Premji tackled a 45.7% dip.
* K P Singh saw his assets plummeting by 76.5%.
    SORRY. This ain't any number crunching. Nor is it an attempt to tell what's been retold. These are plain, simple black & white figures which point out the shades of grey when it comes to Indian billionaires. Yes, euphoria is out and panic is in. And it's not just not the billionaires, even high net worth individuals (HNIs) are feeling the heat, trapped as they are between melting markets and fast eroding capital base.
    So while a Rolls Royce has been added to the long line of cars that dot the driveway and friends and rivals are looking on in jealousy, the fear of shrinking asset values has made its way into the minds of the uber-rich in India. Of course, the dreams of multiplying the investible income of at least $1 million (Rs 4.8 cr) by double or even triple digits, haven't been abandoned just yet, but the worry is more about what can be done to keep those numbers at least where they were last year. Private bankers and wealth managers are working overtime to bolster the confidence of the HNIs and help them avoid the trauma of wealth erosion.
    The shifts have begun. Capital protection is the buzzword of the season and to a great extent, this has translated itself into HNIs sitting on huge piles of cash. While long-term investment strategies are remaining untouched, tactical investments have shifted in favour of cash and the overall allocation to cash in their portfolios has moved northward since the previous year. Indian HNIs seem to be at par with their counterparts in the Asia-Pacific region who, according a recent study conducted by Merrill Lynch and Capgemini, are expected to have about 26% of their portfolio in cash by 2009, says Salil Parekh, CEO, Capgemini India. While the weak-hearted and minimal risk-takers in India are choosing to keep about 30% of their assets in cash, even the more aggressive investors have been advised to put between 15-20%.
    Moreover, with volatility becoming almost synonymous with the Indian markets, equity seems to be bringing on more palpitations among HNIs. The skew towards equity, that was seen in the portfolios of HNIs last year, seems to have undergone a correction this year and experts feel the allocation to equity will fall below 36% that was estimated to be HNIs' allocation to equity last year. Nipun Mehta, executive director, Societe Generale Private Banking, India, says that the focus of HNIs is now on de-risking their portfolio. "While allocation to equity has definitely come down, it is not out of sale of stocks but to a greater extent is the result of the dilution of value in the portfolio," he observes.
    Experts, however, feel that equity is slowly being substituted either by cash or by other fixed income instruments. "Many of the mature investors have begun to understand that there are cycles in the market and that they should look at protecting their wealth in the long term. So the overall outlook towards equity remains positive," says Pradeep Dokania, head, global wealth management, DSP Merrill Lynch. But the overarching question remains: what else can be done?
CURRENT HOTSPOTS
Great returns have taken a backseat in the priority list of people with deep pockets, only to be replaced by safe and stable options like debt instruments. "Cash is increasingly being invested in short-term debt mutual funds and fixed maturity plans as they offer better yields and are more tax efficient than fixed bank deposits," says Vikas Agnihotri, CEO, Religare Macquarie Wealth Management. However, excluding the last two anxiety-ridden weeks, given the rumours regarding potential collapse of banks the world over and even in India, HNIs were also showing an interest in bank deposits which were promising yields of up to 12% on good quality certificates. There is also a new kid on the block. Structured notes are the latest entrants to capital guaranteed products. While structured notes are still in an early phase in India, they are rapidly gaining visibility. The case is similar with bond funds and gilt funds. "With high rates of interest, exposure to bond and gilt funds had been slow but is now increasing," says Dokania. "The trend towards safer investments is likely to continue until the financial markets stabilise," says Parekh. HNIs also seem to be scouting for asset classes which have a low correlation with the equities market such as real estate, private equity, art, film and wine. "Asset classes such as gold and commodities are witnessing renewed interest as they are seen as a hedge against equity downfalls," says Pankaj Narain, director and head, private clients, banking and investments, Deutsche Bank.
As for gold, experts feel the interest is predominantly linked to the fact that gold is available in the form of gold ETFs, gold funds and even in its physical form. Moreover, gold is highly liquid. "We are advising moderate to aggressive risk appetite clients to have an allocation of between 15% and 25% to alternative asset classes depending on their investment horizon and liquidity requirements," says Agnihotri.
WAIT AND WATCH
While HNIs are running, if not racing, to grab the above mentioned asset classes, there are other sectors where they have no clear strategy. Private equity, real estate and overseas investments fall in this group. As an aspirational class, private equity opens the gateway to companies and sectors which are unlisted and may be trading at a discount when compared to listed companies operating in the same sphere. "Considering mid and small size companies have corrected sharply over the past nine months, the valuations at which the unlisted companies can be acquired have come down substantially and make the entry point into this asset class attractive," says Agnihotri. While private equity appears to be the penchant of ultra HNIs, analysts feel the sense of urgency and competition that was there in this space has been replaced by a slow and cautious approach. Also, many investors are resorting to private equity funds and only the more knowledgeable are found to grab stakes directly in companies.
Arguably, the money is flowing towards nonmarket linked assets, but there are apprehensions surrounding real estate, which is not liquid. Once the darling of HNIs, today experts have serious doubts as to whether real estate is still at the core of investment strategy of HNIs. According to Mehta: "There are virtually no transactions happening in real estate apart from exceptional distress sales." HNIs seem to be holding onto property they have acquired, but with fears of falling returns, fresh investments are not taking. At the moment, the HNIs are waiting and watching. But those who wish to remain tied to land, real estate funds is a good option, not only in India but also across other geographies. That may be the case, for now. But with most economies in the throes of a global meltdown and markets turning choppy, HNIs are seriously debating whether it makes financial sense to diversify their portfolio across geographies. Moving to other geographical locations, which offered a greater range of asset classes, had been increasingly viewed as a good route to diversification, but the focus now seems to be directed towards capital protection.
    What's more, the current weakening of the rupee does not make it a viable option for HNIs to seek suitable avenues abroad. Experts feel even if the dollar becomes cheaper in future, it would make sense for Indian HNIs to park money abroad only if their returns are extraordinarily high. Some HNIs, however, are readying themselves to plunge into emerging economies such as Latin America and Eastern Europe. "But for now, investors are just evaluating opportunities overseas rather than taking concrete action," says Dokania.
    When the going gets tough, it's not a bad idea to lie low for some time!
    lisa.thomson@timesgroup.com