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We hope you took the advice of these advisors

Vijay Venkatram, Managing Director, Wealth Forum

22nd November 2016

In a nutshell

The headline of an article in ET today says it all: "Sensex wipes off entire gain of 2016 in 8 sessions". Corrections are always swift and sharp. They don't give you time to react. If you must act, you have to be proactive about managing corrections - being reactive never works. Wealth Forum was proactive about alerting you to do what you need to, when valuations were stretched. Protecting wealth is just as important as creating wealth - and advisors are increasingly adopting strategies that enable them to do this.

Those of us who have been tracking markets for years have come to respect the message that market valuations give us. While market observers may put down this correction to the unexpected demonetization move, more experienced players will tell you that markets always react more sharply to an adverse newsflow when valuations are high. Higher the market valuations, less ready it is to absorb any shocks, and therefore more violent will be its reaction to one.

Important advice for IFAs, from IFAs

When valuations had crossed the historical comfort zone, we at Wealth Forum proactively reached out to leading IFAs across India to seek their inputs on what they are doing with clients' equity portfolios. We posted this article on 16th Sep 2016: Important advice for IFAs, from IFAs.

Here is the question we asked them at that time:

Question: Are you tactically advising reducing equity allocations now or are you staying invested?

Background: There are enough red flags on valuation metrics we all track. The very popular IDFC MF PE scale is now clearly in red zone at a trailing market PE of 21.2. The highly popular I Pru BAF has reduced equity weight from 77% in Jan 2016 to around 57% now, in response to a rise in market valuations. Yet, in recent months, we are flooded with expert views suggesting that a tidal wave of money is coming and will keep coming from NIRP impacted developed markets to emerging markets - and specifically to India. There is a strong argument being put forward on why historical PE bands are out of context in a negative interest world - thus justifying elevated and perhaps more elevated market valuations. There is another dimension - that our economic recovery is gathering momentum and that earnings will shortly justify stretched valuations - so staying invested is what is right.

Amidst these seemingly conflicting views, what are you advising your clients to do now on equity allocations and why?

Many leading advisors were categorical in their view that it was indeed time to reduce equity allocations tactically. Others who don't subscribe to tactical calls were however very clear that it was indeed time to urgently review and rebalance all portfolios, to ensure that client portfolios were not equity heavy when valuations were stretched. We sincerely hope distributors and advisors took the advice of these opinion leaders and acted proactively on their clients' portfolios.

Mr. Bond got his timing bang on!

Mr. Bond got his timing perfect - he posted an article on Wealth Forum just ahead of this correction, on 1st Nov 2016: SIP karo, mast raho is poor advice, where he argued that even for retail investors, a fill it - shut it - forget it approach is sub-optimal and that as advisors, we must be more proactive especially in times when valuations appear stretched.

Tough client conversations ahead

When markets give up gains of a year in just 8 sessions, advisors usually face a lot of uncomfortable client conversations. "Couldn't you have done something about the portfolio?" "If you were tracking the market, couldn't you have taken some action in time?" "What value are you adding if you can't protect my portfolio from eroding along with the market?" Plenty of questions, tough conversations.

No one right style, but clearly one right approach

While I have seen enough advisory styles over the years to understand that there is no one correct style, I can say with some confidence that there is clearly one right way to advice. And that is to first clearly articulate what your investment philosophy is and why and then to ensure that you get clients to buy into your way of managing money - before you take on the task of managing their money.

Some advisors believe strongly in advisor alpha through tactical calls and increasingly HNI clients seem to be demanding this from their advisors. If this be the case, you need to make sure that your investment philosophy around your asset allocation calls is based on a well tested set of parameters which you track independently, rather than being influenced by tactical calls from various fund managers. And, you need to be able to articulate to your clients how you will take your calls and why you believe that's the right way.

If you believe in regular portfolio rebalancing, you need to articulate in your investment philosophy statement about why you believe strongly in this approach and importantly, why you do not believe in taking tactical calls. It is important to have this conversation with your clients before you take on their money - so that they know exactly what to expect from you, as their advisor. And, it is equally important that you unfailingly execute the rebalancing at the agreed periodic intervals as well as when market valuations are at one extreme or another.

And for retail oriented distributors who believe that market tracking is not relevant for their set of SIP oriented clients, Mr.Bond's article is a good wake up call and events of the last few days validate his thinking.

The bottom line is that an advisor's job does not start and end with putting his clients onto the road to long term wealth creation. Protecting wealth that has been created is just as important. Events of the last 8 trading sessions tell you exactly why.

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