imgbd Equity Insights: Advisor Perspectives

Profit booking is a vital part of HNI equity advisory

Lallit Tripathi, Vedant Asset Advisors, Ranchi

In a nutshell

Lallit Tripathi believes that a clear understanding of the HNI investor psyche is very important for an advisor to deliver a good investment experience, and proceeds to list 4 typical characteristics that are common to most high net worth investors. It is this understanding that has enabled him to create an equity advisory proposition that truly delivers an experience that exceeds client expectations. Active advice and regular profit booking are crucial components of this proposition, which has enabled his firm to scale up rapidly to its present situation where it serves over 200 families with a mutual fund AuM in excess of Rs. 325 crores - which is almost evenly split between debt, equity and liquid funds.

Being a successful advisor is all about delivering a satisfying investing experience. To do this, one needs to understand client expectations and the client's psychology clearly. In the HNI space, in my experience, there are four aspects about the way they generally are, which we need to always keep in mind, which will then enable us to deliver an experience that they find satisfactory. These are generalizations, and there will always be exceptions, but I am sure most of us will agree that these are broadly representative of the HNI investors.

  1. Well informed: HNIs are by and large well informed investors. They usually have access to multiple sources of information - and not just to you alone. This sets them completely apart from retail investors.

  2. Find me the "right fund": Another generalization one can make (though there are exceptions as always) is that unless investments are specifically linked to goals that the HNI truly believes in, he will look very closely at annual returns on every component of his portfolio. He expects you to advise him on the "right fund" to invest in. "Right fund" is usually the one that shows up on top of the 1 year returns table. On our part, our job is to keep reiterating the pitfalls of chasing past returns, and to be fair, as we consistently deliver this message, it does have some impact. But still, the urge to compare 1 year league table toppers list with one's own portfolio is there.

  3. FD+2% post tax: The third aspect - which appears somewhat contradictory to the second is what most HNIs really want from their investment portfolios. What they really want is higher than FD returns (FD+2%) on a post tax basis. So, if FDs are delivering 9% taxable and their portfolio delivers 11% post tax, most HNIs are actually happy with this outcome.

  4. Definition of long term: For investments that are not specifically linked to long term goals, the definition of "long term" is neither 1 year or 3 years or any other such period. It is effectively the period within which the investor makes his desired return from that investment. Since most investors really are looking for FD+2% post tax, it usually follows that when they see an investment yielding say 15% p.a., there is an urge to take profits. If that return came after 2 years, then the horizon is 2 years, if that threshold return came in 1 year, the horizon is 1 year.

In our engagement with HNI clients, we try to keep these 4 ground realities in mind, which then helps us shape our advisory proposition to them. Our HNI advisory service revolves around 4 key aspects, which are based on the 4 ground realities I have discussed above.

  1. Volatility is an advisor's best friend: I believe market volatility is truly an advisor's best friend. Volatility creates anxiety, and anxiety often drives investors to make bad decisions. Every bout of market volatility is an opportunity for an advisor to proactively communicate with clients, help them make sense of complex global market dynamics, and reassure them in most cases to stay on course. There are occasions where we need to proactively switch investment strategy - and our job is to assess when to reassure and when to act. If we use every bout of market volatility wisely, we are continuously reiterating our value to them, if we don't we lose our best opportunity to showcase value. In today's context, when well informed investors are increasingly aware of low cost alternatives, it is imperative for us to keep on demonstrating our value. Volatility is an even bigger friend for us, in this context. Recognizing this, we go into communication overdrive whenever there is a bout of volatility. We speak to fund managers, market experts and then try to take a dispassionate objective view, which we then communicate in writing in the form of a note to clients explaining what's happening, its potential impact and what needs to be done or not done in their portfolios. This timely input is very critical in the HNI world.

  2. Active advice: What lies behind the desire to "chase returns" - the desire to keep comparing funds in one's own portfolio against the 1 year return league toppers is simply a desire to make the most of market opportunities. What we call fund manager alpha and advisor alpha is also the same thing - which is an attempt to make the most out of market opportunities. So, while on one hand, our effort continues to persuade investors not to indulge in "return chasing", but at the same time, an equal or more effort is made on trying to deliver that alpha - fund manager as well as advisor. When it comes to fund managers, we do a lot of work to understand processes to gain comfort on sustainability of their alpha. On our side, we look nimbly across asset classes to give tactical calls on asset classes or product categories which we think will add value to their portfolios. In the HNI world, active advice is a reality - especially for that segment of their portfolio that is not earmarked against specific long term goals. For example, over the last 3 years, we have been consistently advocating balanced funds over equity funds, and we sent out to our clients detailed notes explaining our rationale. From 2013 end, we turned bullish on both equity as well as fixed income, and we felt that balanced funds in this environment had the potential to deliver superior returns at lower risk. That worked out quite well. In recent weeks, we have changed our stance on balanced funds and are now advocating large cap funds. Our conviction in the bonds story is a little lower now after the rally and mid and small caps are looking a little expensive. The best category in our view right now is large cap funds. For clients with an aggressive risk appetite, we are recommending banking sector funds now. We believe the worst of the NPA issues are behind them, the worst of the MTM treasury losses are behind them, and the new bankruptcy code is a structural driver that can address their loan recovery issues quite effectively. On a two year view basis, there is scope for re-rating on these counts, apart from the growth in earnings that should come with an improvement in the economic cycle. We communicate our points of view in crisp notes to our clients, which helps them take advantage of such opportunities from time to time. In the HNI space, without active advisory, I believe it will be a struggle to justify incremental costs of a distributor over lower cost alternatives.

  3. Profit booking: Profit booking is a conscious strategy that we adopt. If a fund has delivered say a 15% annualized return over say 15-18 months, we do not hesitate to take profits, deploy the profits in ultra short term funds, and keep the principal amount invested in equities. This works very well from an investor's point of view. Taking money off the table is when you actually "make money" - rest of the time, its only on paper. In 2014, the bull market gave us a lot of profit booking opportunities, which we availed. In 2015, there were hardly any such opportunities. But, client portfolios still looked ok only because we took profits off the table in 2014, and had them in ultra short term funds even as the principal amount struggled in 2015. When markets correct steeply, we deploy some of this money parked in ultra short term funds, back into equity funds. The Brexit day was one such occasion where our clients were investing actively.

  4. Monthly review meeting: I make it a point to conduct a monthly review meeting with my HNI clients, where we discuss markets, market opportunities and portfolio strategy. These regular meetings are absolutely vital to ensure that we remain in touch with client expectations and make every attempt to deliver well against these expectations.

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