Excerpts from the interview:

How do you make a start on managing a client’s portfolio?

To start with, we look at clients with financial assets of Rs 2.5 crore and above, without including their first residential house. We start with the ‘know your client’ profiling and a financial planning module that results in asset allocation.

Asset allocation is also getting more relevant today because you have various asset classes that are not directly correlated — equity, international equity, commodities, bonds and real estate. The singular opportunities in equities that were making people think that returns are easy to come by, have vanished.

When you pick a stock and it doubles in a few months, you tend to think that there is no need to diversify and the whole process of investing begins to look very easy. Now people have started realising that creating wealth and preserving it are two different kinds of expertise.

All of our business is through referrals and we never do cold calls. The second point is that we are the single money manager for most of our clients. When assets get split between many managers, then the overall picture may not be available to any one manager. We have about 500 clients with about Rs.900 crores of assets.

Do you recommend a steady asset allocation or do you make tactical changes?

We start with a core portfolio of equity and a core portfolio of debt. Within that, you may have tactical allocation. For instance, if an investor has a core portfolio of large cap stocks, you may add certain stocks — say, fertiliser stocks — as an opportunity.

However, to take a tactical allocation call, you need a clear signal of the opportunities, which is not very easy. For instance, we reversed many of the long bond portfolios of clients when interest rates fell to 5.20-5.5 per cent two years back, which led to significant gains thereafter.

Today, there is a lot of hype around capital guaranteed structured products and FMPs. But if a client locks a larger portion into these for longer periods, say three-plus years, there is a possibility of missing opportunities when stocks/bonds rally.

We think that this is an appropriate time for people to look at equities very strongly. Locking your money into a product which cuts the upside of equity right in the midst of a correction cannot help your portfolio.

In a runaway market, we try to see that an individual’s stated asset allocation does not move way beyond comfort levels. We do look at macro signals on a regular basis. Decisions such as asset rebalancing are not left to the front office, but are based on the decisions of the central research team.

There are quite a few alternative asset classes on offer today — commodities, frontier markets, private equity. What do you advise clients on those?

In a small portfolio of, say, Rs 10 crore, you may find basic equities, debt, and opportunities in international assets and commodities. You will not find art or private equity! We can’t have uniform portfolio allocations for our clients. Larger portfolios (Rs 100 crore onward) may permit exposure to asset classes that aren’t suitable for other investors. Usually clients enquire about everything, but it is important for us to tell the customer what sort of assets are suitable for him. Validations are important in a client-centric model.

We try to stick to assets that are well understood and researched, where transparency also is high. We try and keep clients away from noise. Today there is so much of noise and so much of advice….. that leads to more confusion than clarity.

Do you also advise clients on their liabilities? What are you telling clients who have seen their loan liability shoot up recently?

We do look at the entire balance sheet. We evaluate if the client has adequate liquidity and is also aware of the valuation of his assets. If you have Rs 3 crore of your total Rs 5 crore of assets in property which is not insured, that is a big risk. If you have a ballooning repayment on a home loan, that is a risk too and we may suggest prepayment.

If the client is young with a long working life ahead of him, we also try to create leveraging capability in his balance sheet. When your earnings capability is set to improve, your ability to take risk also increases.

A lot of people have gone long on stocks and property because we do believe that these two asset classes will certainly reap the benefits of Indian economic growth. By the same logic, you would also want to go in for a floating rate loan, because you expect interest rates to come down over the long term. There is nothing wrong with that ideology. But you have to be conscious of how much of your overall portfolio is committed to one asset and how much of your income goes into repayment of liabilities.

The outlook for equities does carry uncertainty now, while returns on debt options are rising. Would you advise clients to allocate more to debt?

A post-tax return of 9.5-10 per cent a year does look attractive. That, combined with the volatile environment, is driving money to FMPs. The question is: Are you using this as an opportunity? Or are you shifting gears on asset classes for a longer horizon of three-plus years? If you are doing the latter, that isn’t correct. People who have made money in equities today are those who realised the opportunity and invested in 2003 and 2004.

Not those who got into equities in 2007! I would think only 25-30 lakh households are actually investing in mutual funds… that’s a sign of how very few people have benefited from market opportunities of the last three plus years.

Do you advise investors to move into cash when markets become choppy?

Instead of swinging one way or another, we track macro situations closely. For instance, at 17-18k levels we did have a reasonably good valuation for the market and many people were expecting a correction. We clearly saw a situation where the market was richly valued. So we did become guarded on the markets from those levels itself, our clients did not put in significant fresh money between Sensex at 18k and 22k. We trimmed overexposure to markets at that point for many of our clients. That reduced the problem of downside.

We also have inbuilt triggers in our asset allocation to rebalance our portfolios. This is done in consultation with the client, once in about 40-60 days. So we do not change asset allocation based on event based changes in the market.

We only do that based on overall valuations. So if you ask us if we anticipated a correction, we did. Did we anticipate a fall from 21000 to 13000 levels? We didn’t; most of us were prepared only for a 10-15 per cent fall! But that didn’t significantly impact our client portfolios, because rebalancing had been done.

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