One of the approaches that savvy UHNIs take is to try and identify dislocated asset classes, ie., those categories that are out of favour and where price has either fallen or languished for some time.
Few things pique the curiosity of the common investors as the topic of how – and where – the ultra-high net worth individuals (HNIs) are parking their money today. Across the country, as many as 40-50 per cent of Indian business tycoons continue to invest their wealth in their own business, and this is unlikely to change in the near future. What has changed though is the preference of where UHNIs invest, as they are now opting for financial assets over physical assets.
One of the approaches that savvy UHNIs take is to try and identify dislocated asset classes, ie., those categories that are out of favour and where price has either fallen or languished for some time. One such category at the current times is the small cap space. The category has been affected by regulatory action by SEBI with regard to MF reclassification, the prolonged downturn as also the auditor and rating action in the past 24 months. Prices and valuations are quite attractive now and UHNIs don’t mind investing 1-2 years ahead of an economic revival with a long-term view.
A space that has gained increasing attention is the early stage startup investing space. While a lot of the commentary has been around the space getting overheated, we find that the startup ecosystem has significantly evolved over the years. We are seeing young entrepreneurs going beyond marketplaces to solve deep tech problems, manufacturing solutions and host of other innovations that have global application. UHNIs, many of whom are successful entrepreneurs themselves, are probably able to see themselves in these budding entrepreneurs and hence very often the investments go much beyond making returns to actually giving back to society by supporting entrepreneurship.
Investing in global markets is another aspect that has gained importance over the years. The prime driver for this is international diversification which has especially gained attention given the current slowdown in the Indian economy. While global markets are a difficult place to invest in given very low interest rates and high asset prices across the board, UHNIs are making small beginnings with a view to gaining experience in building a robust portfolio over time. Transparent products with high liquidity, transparency and low expenses are an approach many are taking to address this need. Aggressive investors are using their networks to invest into global start-ups and into ReITs or similar assets globally.
ETFs are gaining in importance globally and now locally as well. ETFs, Smart ETFs and quant-based funds are fundamentally much cheaper and if used smartly, can deliver good returns and sometimes beat active management. ETFs with quantitative filters and forensic filters (“Smart ETFs/Quant based ETFs”) are also gaining adoption. ETFs also are a low cost mechanism of playing sectoral themes. A key risk to bear in mind while investing in ETFs is the liquidity of the underlying, which if ignored could lead to significant losses should a market event occur.
As much as we look at what UHNIs do, it is equally important to keep a watch on what they avoid. As an advisory house, we hold the firm belief that a very large part of successful investing comes from avoiding mistakes. UHNIs have grown to be wary of locked in products, products where the underlying is illiquid and products with high expenses.
So, in conclusion, looking out for dislocated asset classes, investing through ETF’s and taking necessary care and advice to avoid the mistakes mentioned above are aspects every investor irrespective of size could build into their investment approach.
(By Rajmohan Krishnan, Principal Founder & MD, Entrust Family Office)