FY19 was a roller coaster year for all investors including the super-rich. Credit market rumblings, equity market volatility and election uncertainty meant tepid returns and even losses in some cases. With hope of an economic revival and a strong majority government back in power, what will FY20 hold in store for the HNI investor? What is the right asset class mix? What are the products one can look at and what is the risk mitigation approach to keep in mind? To discuss CNBC-TV18 spoke to Anshu Kapoor, head Edelweiss Private Wealth Management and Gaurav Awasthi, senior partner at IIFL Wealth Management.
Kapoor said: "The last year was very eventful. It was actually a tale of two halves. Until the beginning of September everything was going very well, all asset classes were performing fairly well and what happened afterwards, I do not think many of our clients or investors were actually prepared for. Since the bull run was going on for so long, we saw the signs of asset allocation being broken in most portfolios. In equities, we saw skewness beyond what was necessary in client portfolios towards what you call higher risks. Within equities we saw over allocation to perhaps midcaps or small caps. Secondly, in some cases use of leverage and third accessing these opportunities through locked-in products where there is either a very heavy exit cost or it is not possible to exit."
Awasthi said: "The key lesson from FY19 remains that you have to hold firm to portfolio allocation and read the signals properly. While the events happened in September but the signals were there from January itself to see what was happening. Even in January if you go back on the equity side, the valuations were very high. In fact, our asset allocation model was talking about zero allocation to midcaps and small caps the way the valuations were. So, we had gone back to clients and said that this is the time to take off risk but unfortunately from a mental perspective people are more attuned to adjusting themselves to last 3 year returns and hoping it will carry forever. The same signs were there in the credit market also. If you go back in January 2018 you were not really getting bank for the buck in credit, the spreads were not attractive, the kind of returns that you were getting for the kind of risk that you were taking was not matching. In fact our call most of last year was to stay in AAA and probably in the shorter end."
Speaking about the FY20 outlook, Kapoor said: "The total size of NPA (non-performing asset) in India is about $200 billion. If you add a few billion dollars here or there, it is not a massive problem for anyone to solve. We expect that liquidity will return, the government we believe is fairly aware of the issues and liquidity should come back. Individual cases in individual funds or investments, you will see some delays or defaults but it will not be really destructive. Mostly I think all the risks are now priced in. If investors are locked into some of the FMP, there is no immediate exit, exit will be possible as and when these issues are resolved, so that the investors will have to live with. Going forward, things should ease out from here and people are actually reviewing the portfolios. If you see the outflows from the fixed income market, they are representative of that awareness and there is a risk off approach right now, clients actually have swung from one end of the risk pendulum to the other end of the risk pendulum."
Awasthi said: "In every crisis there is an opportunity. From our perspective we never thought that mutual funds are possibly the best places to play credit because of the fact that credit in a lot of places was mispriced and also the structure of the underlying deals in a lot of cases, the MF managers were not in complete control because these were large deals and there were multiple parties. So, for the core part of the portfolio where you do not want to take risk, you remain in a AAA short term variety where you are not really taking too much credit risk but part of the portfolio where you actually want to gain returns by taking risk, it is far better to go into maybe alternate investment funds where you have structured deals, deal sizes are Rs 100-200 crore, you have complete control over the underlying, you are the sole lender, so there even if there is a problem, your ability to control and manage the problem is far better and you are getting far more bank for the buck."